42097 Global Economic Prospects Technology Diffusion in the Developing World 2008 Global Economic Prospects Global Economic Prospects Technology Diffusion in the Developing World 2008 © 2008 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 11 10 09 08 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. ISBN: 978-0-8213-7365-1 eISBN: 978-0-8213-7366-8 DOI: 10.1596/978-0-8213-7365-1 ISSN: 1014-8906 Cover photos: Irrigation by Chris Stowers/Panos; Man with Cell Phone by Jacob Silberberg/Panos; Train by Qilai Shen/Panos; Map Projection by Chris Stowers/Panos; and Researcher by Jenny Matthews/Panos. Cover design: Critical Stages The cutoff date for the data used in this report was December 12, 2007. Dollars are current U.S. dollars unless otherwise indicated. Contents Foreword xi Acknowledgments xiii Abbreviations xv Overview 1 Technological achievement and diffusion in developing countries 2 Some policy directions 13 Note 15 References 15 Chapter 1 Prospects for Developing Countries 17 Growth outlook 17 Risks 18 Financial markets: Needed correction or major disruption? 18 Global growth 21 World trade 33 Inflation and commodity markets 36 Risks and uncertainties: Danger of a banking crisis and a U.S. recession 41 Long-term prospects and poverty forecasts 43 Notes 48 References 49 Chapter 2 Technology and Technological Diffusion in Developing Countries 51 The role of technology in development 53 Measuring technology in developing countries 58 Evaluating overall technological progress 78 Technological diffusion over the long term 87 Conclusion 92 Technical Annex: Construction of the summary indexes 92 Notes 99 References 101 v C O N T E N T S Chapter 3 Determinants of Technological Progress: Recent Trends and Prospects 105 Drivers of technological progress: A framework 107 External transmission channels 109 Nurturing technological adaptive capacity 127 Conclusion 150 Notes 153 References 156 Appendix: Regional Economic Prospects 165 East Asia and the Pacific 165 Europe and Central Asia 170 Latin America and the Caribbean 176 Middle East and North Africa 184 South Asia 189 Sub-Saharan Africa 193 Figures 1 Robust growth among developing countries should cushion the developed country slowdown 2 2 Scientific innovation and invention is almost exclusively a high-income activity 3 3 Technological achievement: Converging, but the gap remains large 4 4 The penetration of older and more recent technologies depends on more than income 5 5 Technological achievement tends to level off at different income levels in different regions 6 6 Most technologies fail to penetrate deeply into developing economies 7 7 The urban–rural gap in telephone access in India is huge 7 8 Domestic absorptive capacity both conditions and attracts external flows 8 9 Developing countries’ trade in technology goods has risen 10 10 Macroeconomic stability has improved since the early 1990s 11 11 Literacy rates have increased in all regions 12 12 Developing regions have much poorer governance than do OECD countries 13 1.1 The perceived riskiness of high-yield corporate bonds increased more than that of emerging market bonds 19 1.2 Emerging market asset sell-off more severe than during earlier periods of market turbulence 19 1.3 Global equity markets fall, then recover led by emerging markets 20 1.4 A step-down in growth in 2008 21 1.5 Volatile patterns of growth among OECD countries 23 1.6 Tighter credit and weak housing yield slower U.S. growth 23 1.7 Robust growth in developing country industrial production 24 1.8 Developing growth retains strong momentum during the first half of 2007... 26 1.9 ...with growth moderating through 2009 26 1.10 East Asia now accounts for one-quarter of China’s imports 27 1.11 External positions vary widely across Europe and Central Asia 27 1.12 Growth eases in 2007 for the Latin America and Caribbean region 28 vi C O N T E N T S 1.13 Continued oil revenue gains support growth among Middle East and North Africa oil exporters 30 1.14 South Asia growth is slowing as the Indian rupee appreciates 32 1.15 Oil exporters drive 2007 growth results for Sub-Saharan Africa 32 1.16 Weak U.S. growth reduces demand for developing country exports 35 1.17 Export opportunities for high-income countries 35 1.18 U.S. current account narrows over 2007 and is likely to continue doing so 36 1.19 Inflationary pressures are rising in the Middle East and North Africa and Sub-Saharan Africa 37 1.20 Inflation is broadly stable elsewhere, though at high levels 37 1.21 Commodity prices continued gains through 2007 led by metals 38 1.22 Copper, zinc, and aluminum prices sharply affected by China 38 1.23 Growth in the world’s demand for oil slows 39 1.24 OPEC reduces output to support prices 39 1.25 Agricultural prices surge over 2006–07 40 1.26 A rise in food prices, led by a ramp-up of the prices of fats, oils, and grains 40 1.27 Long-term growth, 1980–2030 44 1.28 Declining capital-led growth for developed countries, 2002–30 45 1.29 Sustained high productivity growth for developing countries 45 2.1 Patent activity is rising in middle-income countries 61 2.2 Electrical consumption varies markedly even at similar income levels 63 2.3 Rail and road densities rise with income and population density 65 2.4 Telephone densities are highly correlated with income, but air transport is not 66 2.5 The incidence of Internet use varies widely across countries 73 2.6 Logistics performance in the world 77 2.7 Distribution of technological achievement by dimension 80 2.8 Increase in summary technological achievement subindexes, 1990s–2000s 82 2.9 Alternative summary indexes of technological achievement 83 2.10 Technological achievement rises with income levels 84 2.11 Comparison of levels of technological achievement, early 1990s and early 2000s 85 3.1 Domestic absorptive capacity both conditions and attracts external flows 108 3.2 Rising share of high-tech imports 112 3.3 Exports of low-, medium-, and high-technology goods 114 3.4 Share of foreign affiliates in business R&D expenditure 117 3.5 Licensing payments have risen sharply 121 3.6 The brain drain is a severe problem in a number of small countries 123 3.7 Share of Ph.D. students still living in the United States five years after graduation 124 3.8 High-skilled emigrants are disproportionately represented in the diaspora 124 3.9 Most developing countries have increased their exposure to external technology 128 3.10 Number of countries in conflict worldwide 129 3.11 Efficiency of contract enforcement 132 3.12 Developing country governance scores relative to OECD average 132 3.13 Regional averages of six governance indicators 133 3.14 Per capita incomes have accelerated in recent years 134 vii C O N T E N T S 3.15 Except in Sub-Saharan Africa, life expectancy is improving 134 3.16 Educational expenditures have risen in some regions 137 3.17 Many developing country students fail to meet literacy standards 138 3.18 Levels of intellectual property protection 146 3.19 Level of and recent changes in technological absorptive capacity 149 A1 East Asian growth moves up in 2007 165 A2 Except for China, inflation is now stabilizing across East Asia 166 A3 Performance improves for East Asian countries other than China 169 A4 Mixed growth outturns across Europe and Central Asia 171 A5 External positions vary widely across Europe and Central Asia 171 A6 Growth in Europe and Central Asia eases into 2009 173 A7 Growth outturns were mixed across Latin America in 2007 176 A8 Latin American inflation eases over the last 15 years 177 A9 Latin America and the Caribbean sovereign bond spreads decline, then increase again 177 A10 Growth in Latin America and the Caribbean eases into 2009 179 A11 Financial test: Credit 183 A12 Exchange rate policy dilemmas? 183 A13 Export product (value) concentration is increasing 183 A14 Export market (value) concentration is falling 184 A15 Growth in Middle East and North Africa picks up 184 A16 Hydrocarbon exports continue to rise on higher prices, modest volume gains 186 A17 Tourism and remittances offset widening trade deficits for Maghreb and Mashreq countries 187 A18 Middle East and North Africa equities rebound from the mid-2007 slump 189 A19 South Asian economies ease into 2007 190 A20 Monetary policy is tightened in response to a buildup in inflation 190 A21 Growth in Sub-Saharan Africa has accelerated markedly. . . 194 A22 . . . reaching a 35-year high in oil-exporting countries . . . 198 A23 . . . and a 10-year high in oil-importing countries 199 A24 Contributions of investment and consumption have increased 199 Tables 1.1 Gross capital flows to developing countries, 2005–07 20 1.2 The global outlook in summary, 2005–09 22 1.3 Recent economic indicators, developing regions, 2005–07 25 1.4 Developments and prospects for world trade and payments 34 1.5 Poverty in developing countries by region, selected years 46 2.1 Disparity among TFP levels remains wide 54 2.2 Scientific and innovative outputs 61 2.3 Indicators of the diffusion of older technologies 64 2.4 Affordability of fixed-line phones falls rapidly with lower incomes 67 2.5 Immunization rates lag significantly in South Asia and Sub-Saharan Africa 68 2.6 Diffusion of both water and sanitation technology is low in rural areas 69 2.7 Diffusion of recent technologies 72 2.8 Share of high-tech products in total exports 73 2.9 The quality of logistics services in 2005 varies by income 77 viii C O N T E N T S 2.10 Indicators included in summary indexes of technological achievement 79 2.11 Technological achievement in developing countries relative to that in high-income countries 81 2.12 Increase in technological achievement in developing countries relative to that in high-income countries 81 2.13 Overall technological progress in absolute and relative terms 86 2.14 Successful diffusion has accelerated 88 2.15 The pace at which technology diffuses has picked up among successful adaptors 89 2.16 Slow diffusion means that many developing countries never reach the 25 or 50 percent threshold 90 A2.1 Indicators used to calculate the summary indexes and overall index related to technological achievement 95 A2.2 Indicators used to calculate the summary indexes and overall index of technological absorptive capacity 96 A2.3 Share of total variance explained by principal components, technological achievement index 96 A2.4 Share of total variance explained by principal components, technological absorptive capacity index 96 A2.5 Share of total variance explained by principal components for each subgroup of indicators 97 A2.6 Factor loadings and variable weights for technological achievement subgroups 98 A2.7 Factor loadings and variable weights for technological absorptive capacity subgroups 98 A2.8 Share of total variance explained by main principal components of technological achievement and technological absorptive capacity using the sub-indexes 99 A2.9 Factor loadings and variable weights obtained from second-stage principal components analysis (2000–03) 99 3.1 Trade in technology goods has increased in developing countries 111 3.2 Foreign direct investment as a percent of GDP 116 3.3 Foreign direct investment as a percent of fixed capital formation 116 3.4 Selected purchases of high-tech firms by companies in developing countries, early 2000s 121 3.5 Increases in exposure to external technologies index, 1990s to 2000s 129 3.6 Macroeconomic stability has improved in developing countries 130 3.7 The regulatory burden is heavier in developing countries than in the OECD 131 3.8 Educational attainment indicators 135 3.9 Relatively high youth literacy rates 136 3.10 Weak financial intermediation hinders technology in developing countries 139 3.11 R&D intensities have increased 141 3.12 Private-public sector R&D 141 A1 East Asia and Pacific forecast summary 166 A2 East Asia and Pacific country forecasts 168 A3 Europe and Central Asia forecast summary 170 A4 Europe and Central Asia country forecasts 174 A5 Latin America and the Caribbean forecast summary 179 A6 Latin America and the Caribbean country forecasts 180 ix C O N T E N T S A7 Middle East and North Africa forecast summary 185 A8 Middle East and North Africa country forecasts 188 A9 South Asia forecast summary 192 A10 South Asia country forecasts 192 A11 Sub-Saharan Africa forecast summary 194 A12 Sub-Saharan Africa country forecasts 195 Boxes 1 Summary of empirical results 14 1.1 Developing country exports in the wake of the removal of barriers to Chinese exports 31 1.2 Biofuels 41 1.3 Policy responses to rising food prices 42 2.1 Technology can contribute to welfare without affecting measures of short-term output 55 2.2 Technological innovation may spur further innovation in upstream and downstream activities 56 2.3 Promoting appropriate technologies in Rwanda 57 2.4 Shortcomings of available measures of technological achievement 60 2.5 Deepwater petroleum technology in Brazil 62 2.6 The green revolution 68 2.7 Technology and growth in Latin America’s natural resource–based economies 71 2.8 Innovative use of communications technology is improving financial access for the poor 75 2.9 The technological divide within India 91 3.1 Technology imports: Different paths for different countries 113 3.2 European call centers in the Maghreb have inspired local entrepreneurs and prompted a specialization in high-value-added services 118 3.3 South African investment in Zambia’s retail sector has improved the quality of local produce and farmers’ earnings 118 3.4 Wal-Mart’s entry in Mexico boosted the Mexican soaps, detergents, and surfactants industry 119 3.5 Technological transfers through the diaspora and return migrants: Some examples 125 3.6 Principal market failures impeding technological progress in developing countries 143 3.7 Government sponsored innovation: Brazilian biofuels 144 3.8 A successful government program of technological development and innovation financing in the Republic of Korea 145 3.9 Technology in 2020 152 x Foreword E ACH YEAR, Global Economic Prospects have also benefited from rising levels of foreign explores critical “here and now” eco- direct investment that often brings with it nomic developments that are relevant to knowledge of important process technologies low- and middle-income countries. Past edi- and foreign markets. Finally, highly skilled in- tions have examined the economic implica- ternational diasporas are exposing developing tions of international and regional trade liber- countries to technology, both through the alization, and migration and remittances. Last trade and marketing contacts that they provide year’s report looked at the recent acceleration to their countrymen and through the return of in growth among developing countries and its former émigrés. sustainability over the longer term. Unfortunately, progress in improving the This year we take a closer look at technol- capacity of developing countries to absorb ogy, a critical determinant of sustainable and make use of those technologies through- growth and poverty reduction. We do so by out their economies has been much weaker. directly measuring the extent to which coun- Whether technological progress in developing tries use technological inputs (including scien- countries will continue to outpace high- tific technologies embodied in goods and income countries will depend on the improve- services and business processes) and produce ments in this regard. The main impediments to technological outputs. The report also exam- further progress is not access to technologies, ines trends in the major channels through but the weakness of domestic skills and com- which technology is transmitted internation- petencies, which prevents many developing ally, and in the country-specific factors that de- countries from exploiting these technologies, termine how well it is absorbed domestically. and rigidities in the regulatory environment Encouragingly, this Global Economic that prevent innovative firms from being cre- Prospects finds that, since the early 1990s, ated and expanding. The diffusion of tech- technological progress in both low- and nologies within countries is often slow, which middle-income countries has increased more means that although some firms may have rapidly than in high-income countries. As a re- technologically sophisticated operations, most sult, the level of technology used in developing do not. Moreover, most of the population and countries is catching up with high-income most firms operate in a low-tech environment. countries. However, the technology gap be- As a result, despite having technologically tween them remains wide. Globalization has sophisticated cities and world-class firms, the underpinned much of the recent progress by economy-wide level of technological achieve- exposing developing countries to foreign tech- ment in countries like China and India is not nology through imports of high-tech consump- very different from that in other countries at tion, intermediate and capital goods. Countries similar levels of development. xi F O R E W O R D This report suggests a number of policy di- middle-income countries with uneven access rections to bolster technology diffusion and to quality secondary and tertiary schooling, absorption within developing countries. First, efforts should concentrate on raising the qual- developing countries should safeguard the ity and quantity of schooling. principle of openness and actively strengthen Finally, governments may need to intervene skills in the domestic population to ensure directly to encourage the rapid diffusion of that they are able to take advantage of future technology and a domestic culture of “new-to- opportunities. Second, to assist diffusion the-market” innovation. However, caution is throughout the economy, policy needs to rein- required. Although direct interventions have force technological absorptive capacity at the sometimes been associated with some impor- subnational and regional levels and to tant technology successes, in many instances strengthen dissemination channels within they have not. Policies that have succeeded countries, including the outreach, testing, have tended to make subsidies conditional on marketing, and dissemination activities of ap- performance and put in place high-quality and plied R&D agencies. Third, authorities should independent-of-industry oversight systems. ensure that publicly supplied technological services and technology-enabling infrastruc- Alan Gelb ture are widely available, whether they are de- Acting Senior Vice President and livered directly by the state or by private firms. Chief Economist Fourth, in low-income countries and in those The World Bank xii Acknowledgments T HIS REPORT WAS produced by staff from the World Bank’s Development Prospects Group. Andrew Burns was the lead author and manager of the report. The principal authors of chapter 1 were Hans Timmer and Elliot (Mick) Riordan. Chapter 2 was written by Andrew Burns and William Shaw, with written contributions from Antonio David, Yvan Decreux, and Annette De Kleine. Chapter 3 was written by Andrew Burns and William Shaw with written contributions from Dilek Aykut, Antonio David, Yvan Decreux, Annette De Kleine, Mariem Malouche, Sanket Mohapatra, and Olga Sulla. Both Chapters 2 and 3 benefitted from the expert research assistance of Taras Chernetsky, Shuo Tan, and Teng Jiang. Several people contributed substantively to chapter 1. The Global Trends Team, under the leadership of Hans Timmer, was responsible for the projections, with written contributions from John Baffes, Paul Brenton, Maurizio Bussolo, Betty Dow, Teng Jiang, Annette De Kleine, Donald Mitchell, Denis Medvedev, Gauresh Rajadhyaksha, Elliot (Mick) Riordan, Cristina Savescu, Shane Streifel, and Dominique van der Mensbrugghe. The poverty numbers originated with Shaohua Chen from the Development Research Group. The accompanying online publication, Prospects for the Global Economy (PGE), was pro- duced by a team led by Cristina Savescu and including Sarah Crow, Teng Jiang, Shunalini Sarkar, and Jennifer Vito, with technical support from Gauresh Rajadhyaksha. Martha Grotton edited the report, Nigar Farhad Aliyeva and Michael Paul managed the pub- lication process, and Merrell Tuck managed the dissemination activities. Roula Yazigi provided invaluable assistance with the design of some figures. Book production was coordinated by Mary Fisk from the World Bank Office of the Publisher. The report was produced under the guidance of Uri Dadush, François Bourguignon, and Alan Gelb. Several reviewers offered extensive advice and comments throughout the conceptualization and writing stages. These included Jean-François Arvis, Kevin Barnes, Vandana Chandra, Prof. Carl Dahlman, Mark Dutz, Alan Gelb, Mary Hallward-Dreimeier, Daniel Lederman, Jeffrey Lewis, William Maloney, Claudia Paz Sepulveda, and Alfred Watkins. xiii Abbreviations BACI Banque Analytique de Commerce International (International Trade Analytical Database) CAGR compound annual growth rate CAT scan computerized axial tomography scan CEPII Centre d’Etudes Prospectives et d’Informations Internationales (Institute for Research on the International Economy) CIS Commonwealth of Independent States DAX Deutsche Aktien Exchange DJIA Dow Jones Industrial Average DPT diphtheria, pertussis, and tetanus DSL digital subscriber ink EAF electric arc furnace EAP East Asia and the Pacific ECA Europe and Central Asia EMBIG Emerging Market Bond Index-G EPO European Patent Office EU European Union FDI foreign direct investment GDP gross domestic product GNI gross national income HIV/AIDS human immunodeficiency virus/acquired immune deficiency syndrome ICB International Crisis Behavior IEA International Energy Agency IMF International Monetary Fund ISO International Organization for Standardization LAC Latin America and the Caribbean LME London Mercantile Exchange MENA Middle East and North Africa xv A B B R E V I A T I O N S MSCI Morgan-Stanley Composite Index NASDAQ National Association of Securities Dealers Automated Quotations OECD Organisation for Economic Co-operation and Development OHF open hearth furnace OPEC Organization of the Petroleum Exporting Countries PC personal computer PPP purchasing power parity R&D research and development SAR South Asia region SMEs small and medium enterprises SSA Sub-Saharan Africa TFP total factor productivity TOPIX Tokyo Stock Price Index UN Comtrade United Nations Comtrade database UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UNESCO United Nations Educational, Scientific, and Cultural Organization UNIDO United Nations Industrial Development Organization USPTO U.S. Patent and Trademark Office WTO World Trade Organization xvi Overview This edition of Global Economic Prospects is countries accounted for more than half the being released during a period of increased un- growth in world imports, contributing—along certainty following four years of record with the depreciation of the dollar—to strong growth in developing countries. In addition to net exports for the United States and further- examining economic prospects over the near ing the reduction in global imbalances. and longer term, it takes an in-depth look at Global growth in 2008 should moderate to the current level of and recent trends in tech- 3.3 percent, as the robust expansion in devel- nological achievement and the main factors oping countries partly compensates for that determine the extent to which developing weaker results in high-income countries. countries succeed in implementing foreign World output should pick up in 2009, ex- technologies. panding by 3.6 percent, as the U.S. economy Notwithstanding the financial turmoil regains momentum. provoked by a reassessment of risks in the Several serious downside risks cast a U.S. mortgage market, and despite large losses shadow over this soft landing for the global in some financial markets, exposure to asset- economy. External demand for the products of backed securities appears to be broadly based. developing countries could weaken much Losses so far have been manageable, although more sharply and commodity prices could de- credit conditions have tightened. For develop- cline if the faltering U.S. housing market or ing economies, sovereign risk premiums have further financial turmoil were to push the increased but remain low by historical stan- United States into a recession. Alternatively, dards. Equity values, exchange rates, and monetary authorities might overreact to the commodity prices have become more volatile, current climate of uncertainty and overstimu- and the vulnerability of countries with large late the economy. This would be particularly current account deficits or pegged exchange dangerous for developing countries if the bulk rates has become more visible. of the resulting liquidity were to move into Against this background, global growth rapidly growing developing regions, provok- slowed modestly in 2007, coming in at 3.6 per- ing the same kind of overinvestment condi- cent after a strong 3.9 percent in 2006. tions that arose in the U.S. housing market. Most of the slowdown was attributable to Prospects for the U.S. dollar represent an weaker growth in high-income countries. additional risk factor. A recession in the United Growth in developing economies was a robust States or an excessive easing of U.S. monetary 7.4 percent, broadly unchanged from 2006 policy could contribute to further sharp declines (figure 1). This strong performance in the in the dollar. A weaker dollar would benefit developing countries has offset somewhat the developing countries with dollar debt, but slowdown in U.S. domestic demand that impose losses on those that hold dollar- started with the unwinding of the housing denominated assets. It would hurt the competi- bubble early in 2006. During 2007, developing tiveness of firms exporting to the United States 1 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 of the economic and social progress of the past Figure 1 Robust growth among few centuries has been due to technology. developing countries should cushion the Technology has been central to both economic developed country slowdown growth and many elements of social welfare Real GDP, annual percent change Forecast that are only partly captured by standard mea- 8 sures of gross domestic product (GDP), includ- Developing ing health, education, and gender equality. As 6 countries measured by total factor productivity, it ex- plains much of the differences in both the level 4 and rate of growth of incomes across countries (Easterly and Levine 2001; Hall and Jones 2 1999; King and Levine 1994). And, looking High-income countries forward, it is expected to play a central role in meeting the environmental and climate-change 0 challenges of the remainder of this century. 00 01 02 03 04 05 06 07 08 09 The private sector and the efficient func- 20 20 20 20 20 20 20 20 20 20 Source: World Bank. tioning of markets are key to technological progress. At the same time, the efficient deliv- ery of socially relevant technological goods and services depends on the direct contribution of (and those producing close substitutes for U.S. nonmarket actors, including governments, imports), while benefiting countrieswithcurren- nongovernmental organizations, and interna- cies pegged to the dollar—at least temporarily. tional organizations. Of course, policy also However, the main impact of a precipitous de- supports technological progress by facilitating cline of the dollar would likely derive from the the smooth operation of markets, by ensuring increased uncertainty and financial-market the acquisition of technological competencies volatility it would provoke, which would in- by the general population, and by providing the crease trading costs, and spreads on developing- physical infrastructure that is often a necessary country debt—resulting in weaker export and complement to technologically sophisticated investment growth throughout the global activities. Active measures to promote technol- economy. ogy diffusion and strengthen the linkages be- Even should such risks not materialize, tween firms and research and development several developing countries may be quite (R&D) agencies are also vital. vulnerable to sudden adjustments in financial In exploring technological achievement and markets. Most exposed are those countries diffusion, this report adopts a broad definition that combine large current account deficits of technology and technological progress, one with pegged exchange rates and with increas- that encompasses the techniques (including ing domestic inflation. Also at risk are coun- the way the production process is organized) tries whose domestic banking sectors have by which goods and services are produced, balance sheets characterized by large currency marketed, and made available to the public. mismatches. Understood in this way, technological progress at the national level can occur Technological achievement and through scientific innovation and invention; diffusion in developing through the adoption and adaptation of pre- countries existing, but new-to-the-market, technologies; T he special topic of this edition of Global Economic Prospects is technology and its diffusion within the developing world. Much and through the spread of technologies across firms, individuals, and the public sector within the country. 2 O V E R V I E W Figure 2 Scientific innovation and invention is almost exclusively a high-income activity Index 0.25 0.20 0.15 0.10 0.05 0 High-income Upper-middle-income Lower-middle-income Low-income countries countries countries countries Source: World Bank. The following discussion traces the struc- almost none of this activity is being performed ture of the overall report, which in chapter 2 in developing countries (figure 2). The lack of explores the level of—and recent trends in— advanced technological competencies in these technological achievement, as well as the countries means that technological progress in process by which technology diffuses between developing countries occurs through the and within countries. Chapter 3 concentrates adoption and adaptation of pre-existing but on the process by which countries absorb for- new-to-the-market or new-to-the-firm tech- eign technology, both the mechanisms through nologies. Moreover, relatively thin domestic which they are exposed to foreign technolo- technology sectors and much better economic gies and the domestic factors that dictate how and scientific opportunities abroad mean that successfully they absorb those technologies. many nationals of developing countries per- Although the chapter identifies a number of form cutting-edge research in high-income important, policy-relevant trends, and it ex- countries. For example, 2.5 million of the plores their policy implications, it leaves to 21.6 million scientists and engineers working future work a more normative analysis of the in the United States were born in developing policies that developing countries should countries (Kannankutty and Burelli 2007). follow to maximize the development benefits of technological progress. The level of technological achievement in developing countries has converged with Policy needs to actively promote that of high-income countries over the technological adoption and adaptation as past 15 years well as nurturing domestic innovative A sustained policy of increased openness to for- capacity eign trade and foreign direct investment (FDI), A central finding of the report is that most de- plus increased investments in human capital, veloping countries lack the ability to generate have contributed to substantial improvements innovations at the technological frontier. in technological achievement in developing Although the number of patents and scientific countries over the past 15 years. And despite journal articles is strongly correlated with rapid progress at the technological frontier, GDP per capita for high-income countries, technological achievement in both low- and 3 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 middle-income countries has increased much Figure 3 Technological achievement: more rapidly than in high-income countries. As Converging, but the gap remains large a result, developing countries have closed Rapid progress in developing countries… the relative gap with high-income countries. Percent change in technological achievement, 2000s versus However, the gap remains large (figure 3). 1990s Moreover, the strong aggregate performance of 180 low-income countries reflects large improve- 150 ments in technological achievement by some, but much more modest advances by the 120 majority. As a consequence, many are only 90 maintaining pace with, or even losing ground to, high-income countries. 60 In general, the level of technological 30 achievement observed in a country is posi- tively correlated with income levels. However, 0 High-income Upper-middle- Lower-middle- Low-income considerable variation is apparent within in- countries income income countries come groups. Among other things, this varia- countries countries tion reflects the nature of the technology being …fueled relative convergence… observed, the impact of the overall policy Index, high-income countries ϭ 100 framework on the ability of technologically 120 sophisticated firms to grow, and the extent to which governments have given priority to and 100 had success in delivering services with a strong 80 technology component. The penetration of older technologies, such 60 as fixed-line telephones, electrical power, trans- 40 portation, and health care services—many of which were originally provided by govern- 20 ments—is only weakly correlated with income. 0 The low-income countries with the highest High-income Upper-middle- Lower-middle- Low-income countries income income countries utilization rates of these older technologies countries countries tend to have rates as high as those of the aver- age lower-middle-income country (figure 4). …but the gap remains large Similarly, the lower-middle-income and upper- Technological achievement index middle-income countries with the highest uti- 0.18 lization rates tend to have rates that match the 0.16 average rate of the next highest income group. 0.14 In part, this reflects the nature of the 0.12 technologies in question, such as electrical 0.10 networks, road infrastructure, fixed-line 0.08 telephony, and sanitation networks. Many 0.06 of these technologies require an infrastructure 0.04 that is relatively expensive to create and 0.02 maintain, and which relies on large numbers 0 of individuals with scarce technical skills. In High-income Upper-middle- Lower-middle- Low-income countries income income countries addition, the observed diffusion of older tech- countries countries nologies today depends on the intensity and ef- Source: World Bank. ficiency with which government services have 4 O V E R V I E W Figure 4 The penetration of older and more recent technologies depends on more than income Penetration of older innovations (2000–03) Index 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0 High-income countries Upper-middle-income Lower-middle-income Low-income countries countries countries Penetration of newer innovations (2000–03) Index 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 High-income countries Upper-middle-income Lower-middle-income Low-income countries countries countries Source: World Bank. been delivered in the past. Part of the strong The penetration rates of newer technolo- technological showing of the countries in the gies have risen relatively rapidly and are more former Soviet bloc is explained by the heavy directly correlated with income than is the case emphasis that past governments placed on pro- for older technologies. The infrastructure for viding basic infrastructure and education to a newer technologies such as mobile phones, wide range of the population. Similarly, past computers, and the Internet is generally less governance problems and civil strife help ex- expensive to create and requires fewer (though plain the relatively weak penetration of these more skilled) workers to maintain. Moreover, technologies in many Sub-Saharan African in many countries, regulatory reform has countries, whereas macroeconomic turmoil meant that the private sector now offers these and a relatively unequal distribution of in- services in a competitive environment as com- comes and skills in Latin America may have pared with the state-owned, monopolistic en- contributed to weak outcomes in that region. vironments of the past. As a result, supply of 5 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 5 Technological achievement tends to level off at different income levels in different regions Technological achievement versus per capita income by region Index 0.30 Europe and Central Asia 0.25 All countries 0.20 0.15 0.10 0.05 Latin America 0 Ϫ0.05 Ϫ0.10 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 Income per capita (PPP) East Asia and the Pacific Europe and Central Asia High-income OECD countries High-income other countries Latin America and the Caribbean Middle East and North Africa Middle East and North Africa South Asia Sub-Saharan Africa Source: World Bank. these new technologies has been more respon- that other factors appear to be restraining sive to market demand and less restrained achievement even as incomes progress. These by the budget constraints of governments or results are consistent with the view that policy state-owned-enterprises. Furthermore, de- choices over the long term (such as those mand for these products has been boosted by that generated the uneven distribution of in- low end-user costs as a result of competitive come and educational opportunities in Latin pricing strategies and because some of these America and the region’s history of weak links newer technologies lend themselves more eas- between R&D communities and the business ily to sharing than do some older technologies. world) are important determinants of absorp- Overall, although technological achieve- tive capacity and technological progress. ment tends to rise with incomes, this relation- ship is nonlinear and shows a tendency to level The level of technology in developing off. Moreover, it is not uniform across regions. countries reflects the pace at which Thus countries in Europe and Central Asia technology diffuses within countries tend to have somewhat higher levels of Although it can take time for a technology to achievement than would be expected on the gain a foothold in developing countries, the basis of income alone, but the overall relation- more serious impediment to technological ship between technological achievement and achievement is the speed with which tech- income in the region tracks relatively well that nologies spread within these countries. On of all countries (figure 5). In contrast, techno- average, the time it takes before official statis- logical achievement in Latin America tends to tics in a developing country record significant be lower than what would be expected given exploitation of a new technology has declined incomes, and the overall relationship suggests from almost 100 years for innovations 6 O V E R V I E W Figure 6 Most technologies fail to Figure 7 The urban–rural gap in telephone penetrate deeply into developing access in India is huge economies Percent of subscribers with phone service Percent 60 120 5% 50 25% Cities 100 50% 40 Rural 80 areas 30 60 20 40 10 20 0 a 98 99 00 01 02 03 04 05 06 0 07 19 19 20 20 20 20 20 20 20 20 1800s 1900–50 1950–75 1975–2000 Source: World Bank calculations using data from Comin and Source: Telecommunications Regulatory Authority of India. Hobijn 2004. a ϭ estimated. discovered in the 1800s to about 20 years example, use world-class levels of technology, today.1 However, technological progress also but the incidence of these technologies else- depends on how rapidly the technology where in the country, and in rural areas in par- spreads within the country. Here the story is ticular, remains low (figure 7). Even within less encouraging. For technologies discovered sectors, technology may diffuse only slowly. In during 1950–75, only a quarter of the devel- Brazil and India, for example, the most so- oping countries that have achieved at least a phisticated firms use technologies and achieve 5 percent penetration level have gone on to levels of productivity that rival world leaders, reach the 25 percent threshold, and all of these but the vast majority of firms operate at levels are upper-middle-income countries (figure 6). of productivity that are less than one-fifth The story is somewhat better for newer those of the top performers. technologies. Not only have these technologies spread more quickly between countries, but also the share of countries that have achieved A framework for understanding the the 25 percent threshold is higher, at 33 per- diffusion of technology within developing cent. Indeed, developing countries have now countries reached the same average level of penetration The bulk of technological progress in develop- of mobile phones as was observed in high- ing countries has been achieved through the income countries in 1995. absorption and adaptation of preexisting and The unevenness of technological diffusion new-to-the-market or new-to-the-firm tech- across countries is often mirrored within nologies, rather than the invention of entirely countries, especially large countries. Although new technologies. Given the still wide technol- technology spreads relatively rapidly among ogy gap, this is likely to remain the case for elites living in major cities, it takes much the vast majority of developing countries. longer for it to find its way to the rest of the A developing country’s ability to absorb population or from top-performing companies and adopt foreign technologies depends on to the average firm. Specific sectors in ad- two main factors: the extent to which it is vanced urban centers in China and India, for exposed to foreign technologies (the pace at 7 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 8 Domestic absorptive capacity both conditions and attracts external flows Technological frontier Transmission Diaspora channels Trade FDI and other networks Technological absorptive Governance and the business climate Policies to - create competencies capacity - build infrastructure Basic technological literacy - foster an innovation- friendly business climate Finance of innovative firms Pro-active policies Technological absorption Spillover Returns to Dynamic effects scale effects magnify technology transfer Domestic technological achievement Source: World Bank. which technologies diffuse across countries) depends on the technological absorptive and its ability to absorb and adapt those tech- capacity of the economy (represented by the nologies to which it is exposed (the pace at multiple-ringed drum). Absorptive capacity which technology diffuses within the coun- depends on the overall macroeconomic and try). Figure 8 presents a stylized description of governance environment, which influences how a developing country absorbs technology. the willingness of entrepreneurs to take risks As a first step, an economy is exposed to on new and new-to-the-market technologies; higher-tech business processes, products, and and the level of basic technological literacy services through foreign trade; foreign direct and advanced skills in the population, which investment; and contacts with its diaspora and determines a country’s capacity to undertake other communications channels, including the research necessary to understand, imple- academia and international organizations (the ment, and adapt them. In addition, because large arrows at the top of the figure). The firms are the basic mechanism by which tech- larger these flows, the greater the exposure of nology spreads within an economy’s private the economy to the global technological sector, the extent to which financing for inno- frontier. vative firms is available—through the bank- However, exposure to new ideas and tech- ing system, remittances, or government niques is not sufficient to ensure that the support schemes—also influence the extent technology diffuses throughout the economy. to and speed with which technologies are Successful absorption of foreign technology absorbed. 8 O V E R V I E W Government policy also has a crucial role imports of capital and intermediate goods to play. Governments are often the primary (which permit the production of technologi- channel through which certain technologies, cally sophisticated goods and services) now such as electricity, fixed-line telephones, represent between 6 and 14 percent of their transportation infrastructure, and medical and GDP, an increase of more than 80 percent educational services, are delivered. Moreover, since 1994. The ratio of high-tech imports government policy is largely responsible for to GDP more than doubled during the same creating a business environment that facili- period. Partly as a result, developing-country tates easy firm entry and exit and that is not exports of high-tech goods have also in- hostile to the profits to be made from exploit- creased, rising from 11 percent of total ex- ing new technologies. Too often, rules and/or ports in the mid-1990s to 19 percent in specific features of the domestic market pre- 2002–04 (figure 9). In the case of lower- vent firms from making money by exploiting a middle-income countries, high-tech goods rep- new technology, and, as a result, the technol- resent broadly the same 23 percent share in ogy does not spread within the country. Policy total exports as in high-income countries (15 should also ensure that R&D and dissemina- percent if China is excluded). tion efforts give priority to creating and intro- The easing of restrictions on FDI also has ducing products for which a market (domestic contributed to technology diffusion within de- or foreign) exists and to helping firms exploit veloping countries. FDI is a major source of those opportunities. process technology and learning by doing op- The overall process is, of course, much portunities for individuals in developing coun- more complicated and much less mechanistic tries. Over the past 15 years, FDI inflows to than is depicted in Figure 8. Technological developing countries have almost doubled as a flows and technological absorptive capacity percentage of GDP. In addition, foreign firms influence each other. How well technology dif- are making important contributions to the fuses depends on various market imperfec- technological capacity of host countries, per- tions, including increasing returns to scale and forming more than 40 percent of the total technological spillovers (the smaller light blue R&D in some countries. At the same time, the rings toward the bottom of the figure). Here competition, standards and knowledge of the existence of a financial sector that inter- foreign markets that foreign firms bring to mediates between savers and innovators may the domestic market can have important be necessary to overcome the initial cost of spillover effects. Finally, many firms in devel- some new technologies. In particular, access oping countries have increased their access to to finance may be essential if innovative firms cutting-edge technology by purchasing techno- are to achieve the necessary scale to unleash a logically sophisticated firms domiciled in high- potential virtuous circle, so that the additional income countries. income garnered by the successful exploita- In addition to dismantling barriers to for- tion of one new technology permits the acqui- eign investment, some middle-income coun- sition of another, thus resulting in further tries have encouraged greater FDI flows by gains. implementing stronger regimes governing in- tellectual property rights (evidence suggests Increased openness to trade, FDI, and that stronger intellectual property rights are diaspora contacts have boosted associated with a rise in knowledge flows to technological diffusion affiliates and in inward FDI flows toward The dismantling of trade barriers in many de- middle-income and large developing coun- veloping countries over the past two decades tries, but not in poor countries). A few coun- has dramatically increased developing coun- tries have encouraged joint ventures rather tries’ exposure to foreign technologies. Their than FDI to maximize technology transfers to 9 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 9 Developing countries’ trade in technology goods has risen Imports of high-tech goods Exports of high-tech goods Percent of GDP Percent of merchandise exports 8 25 20 6 2002–04 15 1994–96 4 2002–04 10 1994–96 2 5 0 0 High-income Upper-middle- Lower-middle- Low-income High-income Upper-middle- Lower-middle- Low-income countries income income countries countries income income countries countries countries countries countries Source: World Bank. local firms. However, this strategy seems to and investment linkages with more advanced work only for countries with substantial mar- economies through networks that provide ket power. In particular, fear of losing control access to technology and capital and through re- over cutting-edge technologies sometimes mittances. Remittances not only contribute to causes multinational firms forced into joint domestic entrepreneurship and investment, but ventures to reserve their best technologies for also, along with the introduction of mobile the domestic market and transfer only older phone services, have greatly expanded the pro- less efficient ones. vision of banking and other arm’s-length fi- Substantial technology transfers are also as- nancial services within developing countries— sociated with international migration and the themselves a critical enabling process diasporas of developing countries. Not all of technology. Finally, returning migrants can these are positive. Even though 93 percent of provide important resources, such as entrepre- university-educated individuals from develop- neurship, technology, marketing knowledge, ing countries return to or remain in their coun- and investment capital. The effect of a single re- try of origin (Docquier and Marfouk 2004), the turning émigré armed with skills acquired in a brain drain is a serious problem for a number of developed economy can have (and has had) mostly small countries. However, the existence large economic and technological effects on the of a well-educated diaspora (more highly- country of origin. skilled individuals migrate than lower-skilled individuals) constitutes an important techno- Better macroeconomic and educational logical resource for the home country—a brain policies have improved absorptive bank, as it were. This is especially the case when capacity in developing countries... weak employment prospects in the home coun- Although increases in the flows of the princi- try reduce the economic benefits initially pal international transmitters of technology forgone by the individual’s departure. have been marked, improvement in the factors For most countries, high-skilled out- that determine the capacity of developing migration remains at managable levels and these countries to absorb and effectively use that technologically savvy diasporas contribute to technology has been much more gradual. On technological transfers by strengthening trade the positive side, most developing countries 10 O V E R V I E W Figure 10 Macroeconomic stability has improved since the early 1990s Median inflation rate Real-effective exchange rate volatilitya Percent Percent 25 8 20 6 15 1990–94 4 2002–06 10 1990–94 2002–06 2 5 0 0 High-income Upper-middle- Lower-middle- Low-income High-income Upper-middle- Lower-middle- Low-income countries income income countries countries income income countries countries countries countries countries Source: World Bank. a ϭ average absolute value of the monthly change in the real-effective exchange rate. have improved their investment climates. has reached 70 years and continues to rise. In Their macroeconomic and political environ- low-income countries outside of Sub-Saharan ments have become more stable over the past Africa, life expectancy is up from 59 years 15 years. The number of international con- in 1990 to 64 years in 2005 (in Sub-Saharan flicts has fallen by more than 50 percent since Africa, extremely low incomes and the the 1990s, median inflation has dropped from HIV/AIDS epidemic have led to a drop in about 20 percent in the early 1990s to less life expectancy since 1990). The labor force than 5 percent, and exchange rate volatility in most developing countries has also become has fallen by more than 50 percent in every de- better educated. Adult literacy rates have in- veloping region (figure 10). All these changes creased in every developing region over the reduce risk and increase the likelihood that en- past 15 years (figure 11). The share of chil- trepreneurs will take a chance and introduce a dren graduating from primary school has also new technology within a country. These same increased in all regions except East Asia and changes have contributed to improved per the Pacific (where it stood at 98 percent in capita GDP and a significant decline in the 2005). Meanwhile, secondary school and col- number of people living in absolute poverty, lege enrollment rates are up across the board. which has eased the constraints on the ability Increased school enrollment has raised youth of poor countries to generate resources for literacy rates to close to 100 percent in all investment, and has increased the willingness the predominantly middle-income regions. Ac- of firms and individuals to take risks. cording to official statistics, almost 75 percent Improvements in the quality of human of 15- to 24-year-olds in Sub-Saharan Africa capital in most developing countries have in- can read and write. That rate compares favor- creased the countries’ capacity to adopt and ably with an adult literacy rate of 60 percent adapt technologies. Poor health is receding as and suggests that over time, the technological a factor that impedes technological progress. literacy of the population will rise. Although Life expectancy in middle-income countries policies to promote literacy and extend school 11 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 political leadership can make a difference. Figure 11 Literacy rates have increased But, in many other countries, the quality of in all regions governance has declined or remained stable. Percent of adult population Progress in the dismantling of regulatory 100 barriers that impede technology diffusion has 2005 80 also been slow. Restrictions on labor mobility 1990 that constrain firms’ ability to reallocate 60 workers within the firm can be important bar- 40 riers to the adoption of new technologies, and restrictions on firm entry and exit tend to prop 20 up inefficient firms and limit the expansion 0 and creation of innovative ones. Overall, the time and cost involved in starting a business, ci ia ia ric n ric d l A nd id bea nd Af ara Pa t As As Af an fic a La ntra e a b a So a a n h si h the efficiency of contract enforcement, the th t ar a s or as Sa ut p C ic Ea C uro e er N E b- i e th Am e Su time required to resolve insolvencies, the aver- E th dl e d tin M an age amount recovered, and the degree of cor- Source: World Bank. ruption in developing countries generates an overall investment climate that is much less conducive to innovation than that observed in attendance are critical, in too many cases, the the industrial countries (figure 12). quality of the education delivered in many de- Along with eliminating unnecessary veloping countries remains low. Large propor- requirements, technological progress often tions of students officially classified as literate requires the strengthening of regulatory initia- fail to pass international standardized tests of tives. For example, improvements in the literacy and numeracy. effectiveness of public-sector institutions have Technological progress requires additional contributed to more efficient logistics services, improvements in the quality of the labor force a key determinant of trade competitiveness. beyond strengthening educational systems. Strengthening contract enforcement, the effi- Training can make an important contribution ciency of court operations, the security of to both the productivity of private firms and the property rights (including the reliability and efficiency of public services. For example, the timely update of property registries), and the dissemination of the simple skills required to effective regulation of financial markets can build rainwater collection systems can improve be critical to ensuring an adequate return to access to clean drinking water and to reduce the investments in technology. Governments also incidence of disease. And investing in the do- can play a key role in boosting technological mestic skills required to support high-skill and progress through the definition and promo- high-value-added industries can help maximize tion of product standards, and in helping the technology spillovers from FDI. firms comply with them. Despite the limited amount of at-the- ...but improvements in the business frontier scientific innovation performed in de- climate and governance lags veloping countries, technological progress In contrast to improvements in the quality of depends on R&D and especially technology human capital, business climate and gov- dissemination activities. In most developing ernance indicators have shown little improve- countries and sectors, R&D should focus on ment, on average, over the past decade. the adoption and adaptation of preexisting Governance in several countries has technologies, not on efforts to expand the improved, notably in Central Europe and the global technological frontier. For low-income Baltic countries, proving that motivated countries, policy should focus on strengthening 12 O V E R V I E W Figure 12 Developing regions have much poorer governance than do OECD countries OECD Caribbean Europe and the Baltics East Asia Developing countries average Latin America Middle East and North Africa South Asia Sub-Saharan Africa Former Soviet Union 0 10 20 30 40 50 60 70 80 90 100 Regional averages of six governance indicators: percent share of average OECD percentile rank Source: Kaufman, Kraay, and Mastruzzi 2007. Note: OECD ϭ Organisation for Economic Co-operation and Development. the infrastructure necessary for the successful technological competencies, a motivated public diffusion and implementation of technologies, sector, and a well-financed private sector are on facilitating the diffusion of already existing key ingredients for success. In addition, several technologies, and on developing domestic general policy directions suggest themselves. competencies. More technologically advanced First, much of the technological progress in middle-income countries should emphasize developing countries over the past 15 years the same points but should strengthen their has been associated with the increase in open- R&D and technical competencies in order to ness that occurred during the same period. increasingly compete at the global technologi- This openness has increased developing coun- cal frontier. In both low- and middle-income tries’ exposure to foreign technologies, but countries, policy should place special empha- their capacity to absorb them has improved sis on incentives and on maintaining strong much less. To the extent that technological ties to private-sector firms. absorptive capacity limits the level of techno- logical achievement that an economy can reach (as suggested by the tendency for tech- Some policy directions nological achievement in Latin America to T his review of the level of and trends in technological achievement in developing countries, of the major transmitters of techno- level off), the relatively weak improvement in absorptive capacity may result in a future slowing of the rate of technological progress in logical knowledge, and of the determinants some countries unless they take significant of countries’ ability to absorb them suggests a steps to raise the quality of domestic human number of empirical conclusions (box 1). This capital, improve the regulatory environment, report does not offer a comprehensive expla- and increase the efficiency with which they nation of why technological progress occurs, deliver government services. This risk may be nor does it include an in-depth analysis of most marked for those countries such as In- the policies that governments can adopt to donesia and Mexico that have taken advan- increase the rate of technological progress. tage of globalization in a relatively passive Nevertheless, the preceding analysis makes manner, exploiting their low-wage compara- clear that some combination of openness tive advantage without taking strong steps to to foreign technology, strong domestic improve domestic competencies. 13 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Box 1 Summary of empirical results F irst, on most fronts, developing countries have progressed markedly over the past 15 years. As a result, technological achievement in all income trade, foreign direct investment, and international migration, which has dramatically increased both the exposure of developing countries to new technologies groups and in every region has advanced more and the opportunities to use foreign markets to quickly than in high-income countries. exploit increasing returns to scale. Second, the technological frontier has advanced as Fourth, progress has also been made in increas- high-income countries (and some developing coun- ing countries’ absorptive capacity through im- tries) continue to innovate at a rapid rate. Thus the proved literacy, enhanced educational attainment, technology gap between developed and developing and better macroeconomic stability. However, countries remains large, particularly for low-income progress in improving the business climate and countries. governance indicators has been much more mixed. Third, to a large extent the convergence in tech- As a result, technological absorptive capacity has nological achievement reflects a substantial increase advanced much less quickly than technological in the openness of developing countries to foreign achievement. Second, because of the complementarity of Efforts to concentrate on increasing the technologies and infrastructure, countries quality of human capital must continue, not where older technologies have yet to penetrate only by ensuring that more students stay in particularly deeply may also face limits to the school longer, but also by raising standards, extent to which other technologies are able to which in too many cases are too low. diffuse. Therefore, the authorities should focus Fifth, given the importance of market fail- on ensuring that publicly supplied technologi- ures (for example, increasing returns to scale, cal services are available as widely, reliably, and the potential for coordination failures, the dif- economically as possible, whether they are de- ficulties in appropriating the full returns to in- livered directly by the state or by private firms. novation owing to imitators, and capital-mar- Third, a main remaining challenge is to ket imperfections), governments may need to ensure that technologies diffuse throughout intervene directly to encourage the rapid the country, not just to major centers or top- diffusion of technology and the growth of a vi- performing firms. This does not mean trying brant domestic culture of technology adapta- to create research centers everywhere, but it tion and new-to-the-market innovation. Poli- does require reinforcing absorptive capacity at cies that have been tried include, among others, the subnational level. Moreover, it means pay- support for industry-specific research, subsidies ing attention to dissemination channels within for specific products, barriers to trade that countries, including domestic transportation favor technology-intensive activities, and di- infrastructure, and the essential role to be rected credit programs. Such policies have been played by the outreach, testing, marketing, associated with economic miracles, particularly and dissemination activities of applied R&D in several East Asian countries. However, they agencies. have also been associated with significant fail- Fourth, notwithstanding the relatively ures, notably in some Latin American and Sub- strong improvement in technological achieve- Saharan African countries. In those cases ment by some low-income countries, many where direct interventions have been success- others have improved only marginally or not ful, they have tended to make support condi- at all. In particular, improvements in techno- tional on performance and have maintained logical absorptive capacity have been limited. high-quality government monitoring programs 14 O V E R V I E W that have avoided being “captured” by indus- Models.” The World Bank Economic Review trial interests. 15(2):177–219. Hall, Robert E., and Charles I. Jones. 1999. “Why Do Some Countries Produce So Much More Output Note per Worker Than Others?” The Quarterly Jour- 1. Significant is defined here to be a penetration nal of Economics 114(1):83–116. rate that is at least 5 percent of the average level in Kannankutty, Nirmala, and Joan Burrelli. 2007. “Why countries with the highest rate of exploitation. Did They Come to the United States? A Profile of Immigrant Scientists and Engineers.” Info Brief. National Science Foundation: Directorate for References Social Behavioural and Economic Sciences. Comin, Diego, and Bart Hobijn. 2004. “Cross-Coun- Arlington, VA. June. try Technology Adoption: Making the Theories Kaufmann, Daniel, Aart Kray, and Massimo Mas- Face the Facts.” Journal of Monetary Economics truzzi. 2007. “Governance Matters: Governance 51(1): 39–83. Indicators for 1996–2006.” World Bank Policy Docquier, Frederic, and Abdeslam Marfouk. 2004. Research Working Paper No. 4280, World Bank, “Measuring the International Mobility of Skilled Washington, DC. Workers (1990–2000).” Policy Research Working King, Robert G., and Ross Levine. 1994. “Capital Paper Series 3381. World Bank, Washington, DC. Fundamentalism, Economic Development, and Easterly, William, and Ross Levine. 2001. “It’s Not Economic Growth.” Carnegie-Rochester Confer- Factor Accumulation: Stylized Facts and Growth ence Series on Public Policy 40:259–92. 15 1 Prospects for Developing Countries Following the sudden and sharp drop in before picking up in 2009. GDP growth market valuations of U.S. mortgage-backed among low- and middle-income economies securities in mid-2007, global markets have eased just 0.1 percentage point in 2007 from entered a phase of heightened uncertainty. the strong 7.5 percent recorded in 2006. This has been reflected in increased volatility Despite weaker U.S. import growth, continued in equity markets, commodity prices, and robust spending by oil-exporting countries and exchange rates. vibrant expansions in China and India are pro- Notwithstanding the increased volatility, jected to keep developing-country growth the impact on developing countries has been strong at 7 percent or more in 2008 and 2009. relatively minor to date. Risk premiums have Over the longer term, the resilience of de- escalated, but remain relatively low in a his- veloping countries’ improved fundamentals toric context, and capital inflows remain will be tested. More prudent macroeconomic plentiful, although bank lending has dropped management and technological progress (see off. Aggregate growth in developing coun- chapters 2 and 3) have contributed to an in- tries continues to be strong, reflecting crease in total factor productivity (TFP) and improved fundamentals in many countries, real income growth over the past 15 years. sizable revenues from commodity exports, Over the next 10 years, these same factors are and continued access to international finance expected to enable developing countries to at moderately higher cost. Their strong gross achieve annual per capita income gains of domestic product (GDP) growth is partially 3.9 percent, and perhaps as much as 3.4 per- offsetting weaker U.S. domestic demand, cent in the following decade. These projec- which is now expected to remain subdued tions imply per capita income growth that is well into 2008. more than twice as fast as that in high-income Despite the resilience demonstrated by the countries. Growth of such magnitude would global economy, risks exist and increased reduce the number of people living on less volatility has made several developing coun- than a dollar a day from 1.2 billion in 1990 tries more vulnerable to financial disturbance, and 970 million in 2004 to 624 million by especially those with large current account 2015. Such aggregate outcomes are not guar- deficits, pegged exchange rates, or domestic anteed, however, and performance across in- banking sectors that have borrowed heavily dividual countries is likely to be diverse. in international markets. Inflation has remained remarkably muted worldwide despite four years of strong Growth outlook growth. Many developing countries have con- O n average, developing countries have been affected only modestly by the slow- down in the United States during 2007, which tained domestic inflation following a tighten- ing of monetary and fiscal policies. The sharp increases in commodity prices mainly had is now anticipated to continue into 2008 one-time direct impacts on inflation, with only 17 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 limited second-round effects. Moreover, the in- new securitized instruments have made identify- creasing integration of developing countries ing the location or magnitude of underlying risk into global markets and their rising shares in difficult, the possibility of a breakdown in a key world trade have helped dampen inflation financial institution or system cannot be fully globally through heightened international discounted. Moreover, the likelihood of finan- competition. In some countries, however, infla- cial problems would increase rapidly if home tion may become an increasing challenge. In prices in the United States were to fall precipi- several oil-exporting countries, spending of tously, an event that could push the U.S. econ- vast export revenues is heating up domestic omy into recession. Such circumstances, and the markets. In China, efforts to slow growth may likely U.S. monetary policy reaction, would not succeed in quickly reversing a recent accel- reinforce the dollar’s slide, with a consequent eration of inflation, and demand pressures destabilizing effect on global markets. remain pronounced in several countries in To date, strong fundamentals in developing Europe and Central Asia and Latin America countries have helped mitigate the slowdown in and the Caribbean. In Sub-Saharan Africa, the the United States, but in the case of a major dis- combination of strong domestic demand and ruption, adverse effects in emerging markets are rising international grain prices could push unlikely to be avoided, which at some point already mounting inflation still higher, particu- would exacerbate the U.S. slowdown. Substan- larly in import-dependent coastal states. tially tighter financial conditions could generate Continued high and increasing oil prices a credit crunch that would have consequences have stimulated the use of food crops for bio- for investment and growth in middle-income fuels and raised fertilizer costs. Prices of maize countries. Low-income countries would also and vegetable oils increased by 33 and 50 per- suffer substantial repercussions resulting from cent, respectively, during 2007. Wheat produc- weaker global demand for commodities, price tion fell short of consumption partly because declines, and terms-of-trade losses. Even with- it has been displaced by maize and partly out further turmoil in international financial because of adverse weather conditions. As a markets, several developing countries have result, stocks have reached historic lows, and become more vulnerable to financial pressure wheat prices have jumped 30 percent. From a as a result of heightened anxiety and increased macroeconomic perspective, these price in- volatility in foreign exchange markets. creases have hit low-income countries the Another important risk is that the loosening hardest, resulting in a terms-of-trade loss equal of monetary policy in response to the U.S. sub- to 0.5 percent of their GDP, with the poorest prime mortgage crisis could cause growth to urban and nonfarming rural segments of the overshoot. Commodity markets could tighten population bearing the greatest burden. While further, inflationary pressures would mount, experience shows that direct and targeted in- and financial imbalances would increase come support, rather than price controls, is the rather than recede. Such a scenario could sow most effective way to help these vulnerable the seeds of a much sharper slowdown in the consumers, the institutional requirements for medium term and illustrates the current chal- social safety nets can be daunting. lenge facing monetary authorities in both high- income and developing countries. Risks Financial markets: Needed T he financial turbulence that emerged in mid- 2007 has demonstrated how sudden and correction or major disruption? pervasive adjustments in financial markets can be. Because the dynamics of financial behavior are inherently difficult to control, and because T he financial market turmoil of the second half of 2007 resulted from the interaction of several factors. An extended period of 18 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S abundant liquidity and low interest rates world- Figure 1.1 The perceived riskiness of high- wide sparked a search for yield that induced yield corporate bonds increased more than many investors to take on additional risk. This that of emerging market bonds was supported by robust global growth and Basis points favorable financial conditions, fueling a four- 600 High-yield spreads in year expansion in the global credit cycle. Rapid developed markets 550 growth in the market for asset-backed securities 500 and structured financial products (collateral- 450 ized debt obligations in particular) throughout 400 major financial centers facilitated both lending 350 (by making the calibration and offloading of 300 risk easier) and borrowing (by effectively in- 250 200 creasing liquidity and the availability of credit). 150 Emerging market bond spreads declined to EMBIG spreads 100 record lows, and equity prices increased rapidly 07 07 07 07 07 7 7 7 07 00 00 00 20 20 20 20 20 20 in many developing countries during the first ,2 ,2 ,2 2, , 3, 2, , 8, 11 11 21 30 .9 .2 .1 n. ay ct b. n. l. g. half of 2007. However, the degree of risk was ov ar Ja M Ju O Fe Ju Au M N especially underestimated in the lower credit Sources: Bloomberg, JPMorgan-Chase, and World Bank. segments of the U.S. mortgage market (sub- Note: EMBIG ϭ Emerging Market Bond Index-G. prime and “alt-A” loans), and hence the value of many asset-backed securities was grossly overestimated. widening attributable to the current episode Corrections to this overvaluation began moving to 170 points. suddenly in late July, and rising default rates Even though the turmoil has affected in the U.S. subprime mortgage market spilled emerging markets, so far the financial fallout over into equity, currency, and bond markets has been limited, though nevertheless more se- worldwide. Credit conditions for corporate rious than other, fairly short-lived episodes of borrowers tightened significantly, while gov- market turbulence and volatility that have ernment bond yields declined sharply in what occurred since 2005 (figure 1.2). Flight to is known as a “flight to quality.” Spreads on noninvestment grade U.S. corporate securities widened by 200 basis points in July and the Figure 1.2 Emerging market asset sell-off first half of August, indicating that investors’ more severe than during earlier periods of appetite for risk had diminished considerably market turbulence (figure 1.1). In mid-August, the U.S. Federal Size of drawdown over peak to trough (percent) Reserve and the European Central Bank pro- 0 vided ample liquidity to the banking system to Ϫ10 help stabilize financial conditions. Ϫ20 The sell-off in risky assets served to widen emerging market bond spreads by about 100 Ϫ30 Emerging basis points by mid-August, raising the cost of market Ϫ40 equities capital for corporate borrowers in both ma- ture and emerging markets. As financial con- Ϫ50 Emerging market bonds ditions tightened once more near the end of Ϫ60 the year, U.S. high-yield spreads jumped to Mar.–Apr. Oct.–Nov. May–June July–Oct. 600 basis points by the end of November 2005 2005 2006 2007 and emerging market spreads retreated, then Sources: Bloomberg and World Bank. increased to 270 basis points, with the overall 19 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 underscored by a resumption of inflows to Figure 1.3 Global equity markets fall, then equity funds, which had experienced outflows recover led by emerging markets of some $5 billion during late July and early Equity market index (January 1, 2007 ϭ 100) August. Until recently, corrections were global 150 MSCI emerging in nature, and stock exchanges in East Asia 140 markets and the Pacific and Latin America and the 130 Caribbean were continuing to drive solid DAX (Germany) recovery in emerging market equities. 120 Gross capital flows to developing countries 110 showed strong gains in 2007 before financial 100 uncertainties arose. Bond issuance, bank loan 90 DJIA (U.S.) commitments, and equity placements together TOPIX (Japan) averaged $53 billion a month from January 80 through July, up from $41 billion during 7 07 7 7 07 07 07 07 ,0 ,0 ,0 2006, but a decline in August dropped flows 5, 0, 4, 8, 2, .1 1 16 1 .3 .1 2 .1 r. n b. p. Ap ay ov Ja n g to $42 billion (table 1.1). The surge in flows Fe Se Ju Au M N Source: Thomson/Datastream. before August was concentrated in bond is- Note: DJIA ϭ Dow Jones Industrial Average; MSCI ϭ suance and equity placements, and these cate- Morgan-Stanley Composite Index; TOPIX ϭ Tokyo Stock gories initially experienced the steepest falloff Price Index; DAX ϭ Deutsche Aktien Exchange. after the turmoil. By October, bond and eq- uity flows had recovered fully or almost fully, but a sharp falloff in bank lending emerged, quality and the need to cover losses in the with commitments dropping $25 billion dur- subprime market provoked a sell-off across ing the month. Viewed on the basis of only the entire spectrum of high-yield assets in ma- moderate increases in sovereign spreads, the ture and emerging markets. Equity price de- lack of bond issuance in August and Septem- clines in emerging market economies initially ber may have reflected decisions by govern- exceeded those in mature markets, but emerg- ments in developing countries to postpone ing markets rebounded sharply, outpacing new issuance because of limited financing gains in mature markets (figure 1.3). The needs rather than an inability to access the Morgan-Stanley composite index of emerg- market. However, for corporate borrowers in ing-market stocks picked up close to 50 per- emerging economies, which accounted for cent from the beginning of the year, well 80 percent of bond issuance during 2007, above the developed markets, before both financial conditions have deteriorated. The retreated in tandem by late November. The decline in banking flows is a concern, possibly rebound in emerging market equities was reflecting a partial near-term withdrawal from Table 1.1 Gross capital flows to developing countries, 2005–07 (monthly averages, $ billions) 2007 2005 2006 January–July August October Total 30 41 53 42 50 Bond issues 11 11 22 3 15 Bank loan commitments 15 20 18 35 10 Equity placements 5 9 13 4 25 Source: Dealogic Loanware and Bondware. 20 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S emerging markets, as banks tighten credit flected the direct fallout of the weakening criteria and assume a more risk-averse posture housing market, with residential investment as they replenish reserves after sharp losses in falling rapidly, and credit conditions for both subprime securities. firms and consumers tightening. Among developing countries, growth re- mained firm at 7.4 percent in 2007, after an Global growth equally strong 7.5 percent in 2006, under- pinned by continued strength in East and A fter four years of robust GDP and trade growth, steadily increasing commodity prices, low bond market spreads, gradually South Asia. If China and India are excluded, activity in low- and middle-income countries changing interest rates, and relatively stable slipped by 0.2 percentage points to 5.7 percent exchange rates, volatility in international mar- in the year. kets has increased. Conditions in global finan- In 2008, global growth is expected to mod- cial markets have turned from exceptionally erate further, as the effective cost of capital re- favorable to less stable and less predictable. mains elevated for financial institutions, firms, More than in recent years, reserves and and households. Weak domestic demand is ex- other buffers will be needed to absorb unex- pected to keep U.S. GDP growth below 2 per- pected shocks. Policy makers must prepare cent in 2008, while growth in Europe and both for the possibility that their economies Japan should continue to ease under the addi- may slow sharply and for the possibility that tional weight of appreciating currencies. growth may continue to exceed potential. OECD import demand is projected to move Similarly, they must prepare for the possibility from a solid 6.8 percent gain in 2007 to 5.4 per- of an abrupt depreciation of their currencies cent during 2008, slowing export growth in de- as well as the possibility that continued capi- veloping countries by a point to 11 percent and tal inflows could push them up. Commodity dampening their output growth to 7.1 percent. prices may spike, or they could give up part of The OECD countries are anticipated to re- the gains realized this decade. cover during the course of 2009, as returning Despite such a volatile climate, aggregate stability in financial markets helps revive con- growth is likely to remain robust for the de- sumer and business confidence and residential veloping countries, mainly because of strong domestic momentum in most of them. Indeed, economic performance for many developing economies was exceptionally robust during Figure 1.4 A step-down in growth in 2008 the first half of 2007, much stronger than an- Real GDP (percent change) Forecast ticipated in Global Development Finance in 8 Developing countries early 2007 (World Bank 2007a). Table 1.2 and figure 1.4 summarize recent 6 developments and the base case outlook. High-income countries World growth eased from 3.9 percent in 2006 4 to 3.6 percent in 2007, with the slowdown led World by members of the Organisation for Economic 2 Co-operation and Development (OECD). Their GDP dipped by 0.3 percentage points to 2.5 percent in the year. The downturn was 0 99 01 9 03 more marked in the United States, with 95 05 07 97 0 19 20 20 20 19 20 20 19 growth slowing from 2.9 percent in 2006 to Source: World Bank. 2.2 percent in 2007. Much of the decline re- 21 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table 1.2 The global outlook in summary, 2005–09 (percent change per annum, except where otherwise indicated) Estimate Forecast 2005 2006 2007 2008 2009 Global conditions World trade volume 7.8 10.1 9.2 7.6 9.2 Consumer prices Group of seven countries a,b 2.0 2.0 1.7 1.7 1.9 United States 3.4 3.2 2.8 2.6 2.4 Commodity prices (US$ terms) Non-oil commodities 13.4 24.5 15.3 Ϫ0.7 Ϫ4.6 Oil price US$ per barrel c 53.4 64.3 71.2 84.1 78.4 Percentage change 41.5 20.4 10.8 18.1 Ϫ6.8 Manufactures unit export value d 0.0 1.6 2.3 0.8 0.8 Interest rates $, 6-month (percent) 3.7 5.2 5.3 4.8 5.0 €, 6-month (percent) 2.2 3.2 4.3 4.0 4.3 Real GDP growth e World 3.4 3.9 3.6 3.3 3.6 World (PPP weights) f 4.8 5.3 5.2 4.9 5.1 High-income countries 2.6 2.9 2.6 2.2 2.6 OECD countries 2.4 2.8 2.5 2.1 2.4 Euro Area 1.5 2.8 2.7 2.1 2.4 Japan 1.9 2.2 2.0 1.8 2.1 United States 3.1 2.9 2.2 1.9 2.3 Non-OECD countries 5.8 5.6 5.1 4.8 5.0 Developing countries 6.8 7.5 7.4 7.1 7.0 East Asia and the Pacific 9.1 9.7 10.0 9.7 9.6 China 10.4 11.1 11.3 10.8 10.5 Indonesia 5.7 5.5 6.3 6.3 6.5 Thailand 4.5 5.0 4.3 4.6 5.2 Europe and Central Asia 6.1 6.9 6.7 6.1 5.7 Poland 3.6 6.1 6.5 5.7 5.1 Russian Federation 6.4 6.7 7.5 6.5 6.0 Turkey 7.4 6.1 5.1 5.4 5.7 Latin America and the Caribbean 4.6 5.6 5.1 4.5 4.3 Argentina 9.2 8.5 7.8 5.7 4.7 Brazil 2.9 3.7 4.8 4.5 4.5 Mexico 2.8 4.8 2.9 3.2 3.6 Middle East and North Africa 4.3 5.0 4.9 5.4 5.3 Algeria 5.1 1.8 3.4 4.0 3.8 Egypt, Arab Rep. of 4.4 6.8 7.1 7.0 6.8 Iran, Islamic Rep. of 4.3 4.6 5.0 5.0 4.7 South Asia 8.7 8.8 8.4 7.9 8.1 Bangladesh 6.0 6.6 6.5 5.5 6.5 India 9.2 9.4 9.0 8.4 8.5 Pakistan 7.7 6.9 6.4 6.5 6.7 Sub-Saharan Africa 5.8 5.7 6.1 6.4 5.8 Kenya 5.8 6.1 6.3 5.3 5.1 Nigeria 6.6 5.6 5.9 7.4 6.1 South Africa 5.0 5.4 5.0 5.1 5.3 Memo items Developing countries Excluding transition countries 6.9 7.5 7.5 7.2 7.1 Excluding China and India 5.2 5.9 5.7 5.3 5.2 Source: World Bank. Note: OECD ϭ Organisation for Economic Co-operation and Development; PPP ϭ purchasing power parity. The CPI figures in this table that were released on January 9, 2008, reflected typographic errors. Current figures were released on January 11, 2008. a. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. b. In local currency, aggregated using 2000 GDP weights. c. Simple average of Dubai, Brent, and West Texas Intermediate. d. Unit value index of manufactured exports from major economies, expressed in U.S. dollars. e. GDP in 2000 constant dollars; 2000 prices and market exchange rates. f. GDP measured at 2000 PPP weights. 22 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S investment bottoms out. On aggregate, Figure 1.6 Tighter credit and weak growth in developing countries is expected to housing yield slower U.S. growth be robust in both 2008 and 2009, remaining at or above 7 percent. Real GDP growth at annual rates (percent) Forecast 5 The high-income countries 4 Among OECD countries, the first quarters of 2007 appeared to be a prelude to more 3 volatile growth (figure 1.5). U.S. GDP weak- ened sharply in the first quarter before re- 2 bounding to 3.8 and 4.9 percent in the second 1 and third quarters on the strength of business investment in the second quarter, surprisingly 0 strong consumer demand and stock-building 06 08 06 05 05 07 07 in the third, and strong net exports in both. 20 20 20 20 20 20 20 1, 1, 3, 3, 1, 1, 3, Q Q Q Q Q Q Q But high-frequency data point to weaker con- Source: World Bank. sumption growth in the fourth quarter, and Note: Q ϭ quarter. for the year as a whole, 2.2 percent growth is expected, 0.7 percentage points below 2006 results (figure 1.6). In contrast, Japan and the Euro Area main- tained a favorable pace of growth in the first quarter, with business confidence breaching with growth returning to a favorable 2.9 per- record highs, but developments in the second cent. GDP gains were broadly based across quarter were disappointing. In Europe, a re- countries, while business investment, stocks, trenchment in business capital outlays more and consumer spending in France and than halved GDP gains of the previous quar- Germany revived to spur overall growth. ter, while in Japan, a slide in fixed investment The Japanese economy rebounded mod- turned growth into a decline. Third quarter re- estly in the third quarter as well to register sults for Europe provided an upside surprise, growth of 1.5 percent after a 1.8 percent de- cline in the previous quarter based on much improved net exports and a moderate boost to household spending. For 2007 as a whole, Figure 1.5 Volatile patterns of growth European growth is expected to register a among OECD countries strong 2.7 percent, eclipsing the United States Growth at seasonally adjusted annualized rates for the first time in more than a decade, and 6 Q2, 2007 growth in Japan should register 2 percent. Q1, 2007 Q3, 2007 GDP growth in the United States is 4 projected to weaken further in 2008, falling to 1.9 percent. During the year, continuing diffi- 2 culties in the commercial paper market, the source of working capital for most U.S. busi- 0 ness, implies a boost in the effective cost of short-term funds, despite a cumulative reduc- Ϫ2 United States Japan Euro Area Germany tion of 100 basis points in Federal funds over September through December, which carried Source: National agencies and Eurostat. Note: Q ϭ quarter. the rate to 4.25 percent. Recovery is antici- pated for 2009, with growth registering 23 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 2.3 percent, grounded in a stabilization of fi- 7.3 percent in September 2007, the lowest nancial markets and a revival of business and level since figures began to be compiled in household spending. 1993. Business investment continues to move As a result of weaker domestic demand and in close step with export performance, which stronger export performance (in part based on deteriorated toward the end of the year, in a substantially weaker dollar and continued part because of the appreciation of the euro solid demand from emerging markets), the and slowing U.S. demand. As exports soften U.S. current account deficit is expected to de- and business investment declines, GDP cline from its high of 6.6 percent of GDP in growth is projected to slip to 2.1 percent in 2006 to around 5 percent by 2009. Inflation is 2008 before reviving to 2.4 percent in 2009. anticipated to moderate toward 2.5 percent, in step with slower growth, while household The developing countries savings could move toward positive ground The first half of 2007 was marked by an for the first time in many years. Developments acceleration in industrial production across in the United States are expected to influence developing regions, notably in East Asia conditions in Japan, both because of Japan’s (20 percent, year over year) (figure 1.7 and reliance on trade as a source of growth and table 1.3).2 A pickup in China’s production, because of the sensitivity of business invest- together with momentum gains in Indonesia ment to the costs of long-term capital. This is (7.3 percent) and Thailand (6.0 percent), re- of particular note given Japan’s experience sulted partly from a bottoming out of the with the yen carry trade.1 Because such trade high-tech slump in the second quarter of the can potentially unwind rapidly, with local cur- year. South Asia’s continued buoyant produc- rency proceeds used to redeem yen, substan- tion gains are linked to double-digit growth tial appreciation of the currency could hamper in India, which is tied in turn to strong do- exports, production, and incomes. Growth in mestic demand. Latin America and the Japan is expected to slow to 1.8 percent in Caribbean achieved a 6.4 percent increase in 2008 before picking up to 2.1 percent by industrial production during the second quar- 2009. ter, at a seasonally adjusted annual rate, up Household spending in the Euro Area has from 2.4 percent during the first. Within the not yet fully recovered from the increase in the region, strong performance in Brazil (10 per- German value added tax of January 2007, cent), Colombia (13 percent), and Mexico although unemployment in Europe eased to (5.5 percent) have offset weakening output Figure 1.7 Robust growth in developing country industrial production Industrial production (percent change, seasonally adjusted annualized rate) 28 24 Developing countries 20 16 OECD 12 World 8 4 0 Jan. May Sep. Jan. May Sep. Jan. May Sep. 2005 2005 2005 2006 2006 2006 2007 2007 2007 Source: World Bank. 24 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S Table 1.3 Recent economic indicators, developing regions, 2005–07 Growth year- Seasonally adjusted Growth year- on-year annualized growth on-year Indicator and region 2005 2006 Q1, 2007 Q2, 2007 H1, 07 Latest GDP growth (percent) a Developing countries 6.8 7.5 8.5 7.0 7.5 — East Asia and the Pacific 9.1 9.7 10.3 10.5 9.8 10.2 Europe and Central Asia 6.1 6.9 3.8 4.3 6.3 — Latin America and the Caribbean 4.6 5.6 7.5 5.0 5.9 5.7 Middle East and North Africa 4.3 5.0 4.8 4.5 4.7 — South Asia 8.7 8.8 15.6 7.7 9.2 — Sub-Saharan Africa 5.8 5.7 4.9 4.0 5.0 — Industrial production growth (percent) Developing countries 9.3 10.1 14.6 18.5 14.0 11.4 East Asia and the Pacific 13.8 14.3 19.6 28.9 19.6 16.4 Europe and Central Asia 1.4 4.5 5.6 0.0 3.7 5.0 Latin America and the Caribbean 3.9 4.3 2.4 6.4 3.8 4.6 Middle East and North Africa 4.4 Ϫ0.3 Ϫ1.9 1.5 Ϫ0.5 Ϫ1.2 South Asia 9.1 11.0 15.6 11.3 13.0 8.0 Sub-Saharan Africa 5.0 5.3 — — — — Consumer prices (year over year growth rates in percent) Developing countries 6.4 6.2 5.7 6.1 5.9 6.1 East Asia and the Pacific 7.2 4.9 4.3 3.4 3.8 3.1 Europe and Central Asia 4.4 5.6 4.5 4.8 4.7 7.1 Latin America and the Caribbean 5.4 5.6 5.8 5.0 5.4 4.7 Middle East and North Africa 2.8 1.8 4.9 4.2 4.5 5.0 South Asia 7.0 7.6 7.1 6.4 6.7 6.9 Sub-Saharan Africa 3.4 4.6 6.3 7.1 6.7 7.1 Spreads on debt (basis points) Developing countries 306 198 176 162 169 243 East Asia and the Pacific 265 180 138 129 134 207 Europe and Central Asia 185 137 147 134 141 192 Latin America and the Caribbean 364 213 183 167 175 259 Middle East and North Africa 324 338 418 434 426 548 South Asia 199 199 166 171 169 482 Sub-Saharan Africa 277 266 283 270 277 321 Source: National statistical agencies through Thomson/Datastream; spreads: JPMorgan. Note: Q ϭ quarter. Quarterly 2007 growth for developing regions based on data available for key economies. EAP: China, Indonesia, Malaysia, Philippines, Thailand. SAR: India. ECA: Hungary, Poland, Russian Federation, Turkey. LAC: Argentina, Brazil, Chile, Colombia, Mexico. MENA: Arab Rep. of Egypt. SSA: Nigeria, South Africa. — ϭ not available; H1 ϭ 1st half. a. Growth rates at annual or annualized rates unless otherwise indicated. gains in Argentina and the República down of growth in 2008 should be less pro- Boliviarana de Venezuela. nounced. Gains among developing countries Robust production data are also reflected are projected to slow from 7.4 percent in 2007 in GDP results. Led by the large economies, to 7.1 percent in 2008, with easing across all notably China, India, and the Russian Federa- regions except the Middle East and North tion, output for the developing countries Africa and Sub-Saharan Africa, in part because averaged 7.5 percent (year-on-year) in the first of higher oil revenues. For the remaining coun- half of 2007, matching the record pace of tries, slower export market growth, only grad- 2006 (table 1.3 and figure 1.8). Because ual improvement in financing conditions, and developing economies have been less affected declines in the terms of trade account for most by the fallout from the subprime crisis than of the slowdown. Though a further easing of high-income economies, the anticipated slow- growth to 7 percent is anticipated for 2009, 25 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 performance since 1994. Growth in China is Figure 1.8 Developing growth retains expected to exceed 11 percent (table 1.2). Else- strong momentum during the first half where in the region, strong investment demand of 2007... boosted growth in Indonesia by almost a GDP growth (percent) percentage point, from 5.5 percent in 2006 to 10 6.3 percent in 2007. Tighter monetary policy and the economy’s absorption of the direct 8 2006 2005 H1, 2007 effects of the removal of energy subsidies in 2006 have nearly halved inflation, from 6 13 percent in 2006 to 7 percent in 2007. Growth is expected to remain in the 6 percent 4 range. Growth in Malaysia and the Philippines appears to have picked up as well, coming in at 2 near 6 percent or better, reflecting a relaxation ia ia E tri g ha ea a a Af nd d La As d un pin Sa ibb ric ric As As n of monetary policies and improved external C uro es ra n a th t a tra e a th tin ia b- ar me Af ric co lo st h or as ut e en p n Ea Su C A ev So N E l demand for electronics. Growth in Thailand ld e dl Al id e has been more subdued during 2007, at a little M an over 4 percent, tied in part to political unrest, Sources: World Bank and National agencies. as well as a lagging response to the high-tech Note: H1 ϭ 1st half. revival. Assuming that China continues its double- digit growth and that the authorities succeed Figure 1.9 ...with growth moderating in dampening overheated sectors, GDP through 2009 growth in East Asia should slow gradually to Real GDP (percent change) 9.7 percent in 2008 and to 9.6 percent by 10 2009. Many countries in the region could, 2008 however, experience a stalling of export 8 2007 2009 growth and a loss of business and consumer confidence, leading to a moderate falloff in 6 GDP gains in 2008. The effects from the turmoil in the world’s 4 financial centers may be minimal for most economies in East Asia. Except for China, di- 2 rect exposures of financial institutions in the ia ia E tri g a ha ea a ric d d La As nd n ric Sa bb ric As As Af an un pi ra n C uro es region to mortgage-backed securities (or sub- tra e a a th tin ia Af b- ari e co lo st h Su C Am th t or as e ut en p n Ea ev So N E prime risks) are limited.3 Economies in East l ld e dl Al id e Asia and the Pacific are entering this more M an turbulent period from a position of relative Source: World Bank. strength: improved macroeconomic fundamen- tals, further movement into current account global conditions should favor a smoother surplus, and rapidly increasing reserves. Yet step-down in activity for those countries and several of these economies have been the object regions more dependent on trade, notably East of international investor interest through carry Asia and Latin America (figure 1.9). trades.3 Should conditions in the mature mar- kets deteriorate so that assets are shifted out of Developing region perspectives classes perceived as risky to cover other losses, GDP in East Asia and the Pacific is expected to the threat of an unwinding of the yen carry grow about 10 percent in 2007, the strongest trade, with attendant down-spikes in local 26 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S equity markets and rapid currency deprecia- tied to European Union (EU) accession by sev- tion, is a concern for policy makers. eral Central and Eastern European countries, Possible side effects related to financial and continuing high oil prices that have fueled market turbulence—notably a distinct soften- a construction boom in several countries of ing of U.S. and European import demand— the Commonwealth of Independent States could affect all East Asian countries. The Euro (CIS). Area and the United States together account The falloff in external demand took hold in for 43 percent of China’s export market, while the second half of 2007, slowing growth by Japan accounts for 7.5 percent. With the de- 2 percentage points, as net exports continued velopment of China as a hub for the final as- to deteriorate. Inflation has risen in several sembly and shipment of goods to destination countries, tied to sustained strong growth in markets, with parts and materials supplied by domestic demand, rising fuel and food prices other East Asian economies (figure 1.10), (the latter aggravated by drought in Bulgaria slower import demand from developed coun- and Romania), and higher world grain prices. tries could adversely affect the entire region. Rapid credit expansion in most of the region Some East Asian economies could experience has contributed to a worsening of external a double hit, sustaining a loss of both direct balances while exerting upward pressure on and indirect import demand. asset, goods, and labor market prices (fig- In the Europe and Central Asia region, ure 1.11). Signs of overheating are evident in investment and external demand are both Bulgaria and the Baltic states, for example, slowing, leading to a moderate easing of where external positions have deteriorated growth from 6.9 percent in 2006 to 6.7 per- from already high levels. Effects on the region cent in 2007. Private consumption, fed by stemming from the crisis in the U.S. subprime robust credit creation, accounted for 4.6 per- mortgage market have thus far been limited. centage points of the advance in 2007. Invest- Initial downward adjustments to asset prices ment, which accounted for 3.4 percentage points of growth in 2007, was driven by pol- icy reforms, improved business confidence Figure 1.11 External positions vary widely across Europe and Central Asia Current account balance as a percent of GDP 20 Figure 1.10 East Asia now accounts for 2007 15 2006 one-quarter of China’s imports 2005 (percentage of total imports) 10 12 5 10 0 8 Ϫ5 Ϫ10 6 Ϫ15 4 Ϫ20 2 Ϫ25 0 n ne ia n ia U tate of ry nd pe mo ro nd st Ce sia d tio ta tv an l A an ga ai zb s h nd nw pe is la de m Eu l a La ra t S alt kr om e hi , a na ek un Po C ong tra e s nd de In Co rn tra f or si U en op .o en e ne H R hi In na ne Fe ap n ila C ur ep pi K ,C do E a ng an ilip g R Th e an on si Si Ph a, us Ea iw H re R Ta Ko Source: National sources through Haver Analytics. Source: World Bank. 27 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 and currencies have since been recouped and Figure 1.12 Growth eases in 2007 for the bond spreads increased, but to a lesser extent Latin America and Caribbean region than in other markets. Regional GDP growth is expected to slow Latin America and the Caribbean to 6.1 percent in 2008 and 5.7 percent in 2009. Given tighter international credit condi- Venezuela, R.B. de tions and weakening external demand, the Argentina growth falloff in 2008 is likely to affect almost the entire region. Domestic demand is also Dominican Republic projected to soften slightly from its recent strong growth, with contributions to GDP of Colombia both private consumption and investment Honduras dropping by 0.2 percentage points during 2008. Chile Three exceptions to this growth forecast Brazil for 2008 are Albania, Hungary, and Turkey. In 2005 Albania, growth is likely to firm on continued Mexico 2006 2007 strong domestic demand, including an in- crease in public investment. That investment is Jamaica crucial to overcome substantial problems in 0 3 6 9 12 infrastructure, as power shortages now form a GDP growth 2005–07 (percent) significant bottleneck to growth. In Hungary Sources: World Bank and national agencies. and Turkey, further easing in monetary policy is expected to strengthen domestic demand, leading to a pickup in growth. ment, together with better macroeconomic External demand is projected to revive by management, helped improve fundamentals, 2009 as GDP growth among the OECD coun- reduce the volatility of economic indicators, tries picks up. After slowing GDP by 2.2 per- and sustain growth. GDP in the region picked centage points in 2008, net exports are up to a 5.9 percent pace in the first half of projected to boost growth by 1.7 percentage 2007 on the back of continued strong activity points in 2009. This gain is expected to be off- in Argentina, Brazil, Chile, and the República set by further slowing in domestic demand, Boliviarana de Venezuela. In addition, the particularly investment in the CIS countries, mid-2007 credit market turmoil that hit the yielding GDP growth of 5.7 percent in 2009. United States seems to have had limited effects The expected falloff in investment in the CIS is on Latin America and the Caribbean to date. driven by the completion of hydrocarbon in- To a degree, the recent upturn in growth will frastructure projects that have supported pro- serve as a buffer. Even though any stagnation duction and export capacity in recent years. in the United States will eventually affect re- In Latin America and the Caribbean, GDP gional prospects, countries seem better pre- advanced by 5.1 percent in 2007, the fourth pared for exogenous shocks than during prior consecutive year of sustained growth. The episodes of financial market disturbance. average rate of output gains over 2005–07 In contrast with previous expansion was 5.3 percent, twice the 2.7 percent regis- phases—and indeed, with previous episodes of tered during the previous 15 years. Recent crisis—Latin America and the Caribbean is growth has also been broadly based, with pos- now recording a healthy current account sur- itive results shared across subregions: South plus and accumulating large stocks of interna- America, Central America, and the Caribbean tional reserves. The improvements of recent (figure 1.12). A favorable external environ- years might indeed be sufficient to ward off 28 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S some of the adverse effects of developments in further buttressing government revenues, the United States. For example, at the time of some of which are dedicated to infrastructure the 1998 Russian crisis, the current account spending in the developing oil exporters (prin- deficit for the region was close to $89 billion cipally Algeria and the Islamic Republic of or 4.4 percent of GDP. In 2003, the deficit re- Iran). At the same time, a solid pickup in versed to a surplus, and in 2006, the region European growth over the course of 2007 has had a surplus of more than $46 billion, equiv- favored economic activity among the diversi- alent to 1.6 percent of GDP. Trade liberaliza- fied exporters in the Maghreb and Mashreq, tion and flexible exchange rates are among the which have especially close trade and services frequently cited policies that facilitated these ties with the Euro Area. GDP in the Middle improvements in external balances. East and North Africa appears to have fared On the heels of strong growth in 2007, well over the first half of 2007, though easing regional GDP growth is expected to ease to from 2006 to a 4.7 percent pace during the pe- 4.5 percent in 2008 and further to 4.3 percent riod, with the slowing tied in part to a return by 2009. Such measured regional slowdown to drought conditions that have affected is underpinned by continued strong growth several countries in the Maghreb, notably in Brazil and a rebound from a weak 2007 in Morocco. Mexico, while growth in other countries— The run-up of surplus funds among oil ex- notably Argentina and the República porters and the availability of new investment Boliviarana de Venezuela—is likely to slow. opportunities across the region boosted for- Excluding the latter two countries, GDP mod- eign direct investment (FDI) flows to new erated slightly from 4.7 percent in 2006 to highs of more than $24 billion in 2006, or 4.4 percent in 2007 and, following an antici- 3.4 percent of regional GDP. At the same time, pated dip to 4.2 percent in 2008 because of recovery of local equity markets offers weak import demand in the United States, is promise that after bouts of overheating during expected to recoup to 4.3 percent by 2009. 2004–05 and stabilization following the re- Should these outturns be realized, they would cent tensions in global financial markets, a less represent the longest positive growth spell for volatile source of funds may play a larger role Latin America and the Caribbean since the in the region’s growth. 1960s. Despite a gradual worsening of current Developing country oil exporters in the account positions because of stabilizing com- Middle East and North Africa registered modity prices and slower growth in global growth of 4.5 percent in 2007, half a percent- demand, strong growth is likely to persist, age point up from 2006, as GDP in the Islamic supported by continued expansion in con- Republic of Iran advanced to 5 percent, while sumption and investment, buoyed by an envi- output in Algeria almost doubled from the ronment of low inflation (excluding Argentina poor 1.8 percent showing of 2006. Hydrocar- and the República Boliviarana de Venezuela), bon revenues (oil and natural gas) flowing to improved fiscal policy (particularly in Mexico), developing country exporters amounted to and continued strong capital inflows (especially $167 billion in the year, representing an in- to Brazil). crease of 5.7 percent, or $9 billion, over 2006 High oil prices have continued to support results. In contrast, export revenues for the growth for the oil-exporting countries in the high-income country exporters grew by 6 per- Middle East and North Africa, coming on the cent to $360 billion, an increment of $20 bil- heels of a 5 percent regional GDP advance in lion, over 2006 levels (figure 1.13).5 2006, the fastest in a decade for the region’s For diversified exporters, trade responded developing countries.4 Oil prices, which well to increased European demand, and to a spiked to almost $100 per barrel late in the degree by a depreciation of local currencies in year and averaged $71 per barrel for 2007, are relation to the euro. Exports of goods and 29 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 disparate economies of the region, as will Figure 1.13 Continued oil revenue gains efforts at reform, which in most cases are support growth among Middle East and North Africa oil exporters aimed at spurring private sector or non-oil ac- tivity. Tensions related to continuing conflict Crude oil and product revenues ($ billions) oil price, World Bank ($/barrel) in Iraq, unsettled conditions in the Levant, and international disputes with the Islamic $/bn $/barrel 550 75 Republic of Iran will tend to affect global and 500 70 regional investors’ confidence concerning the 450 Oil price 65 region, and any projections exercise about the 400 (right axis) 60 region should take these into account as a risk. 350 55 In South Asia, regional GDP growth re- 300 50 mained vibrant at 8.4 percent in 2007, though 250 45 easing somewhat from the stellar 8.8 percent 200 40 gains of 2006. Industrial production and GDP 150 35 growth are being driven by strong domestic 100 30 50 25 demand, with private consumption and in- 2002 2003 2004 2005 2006 2007 vestment each contributing about 4 points to Low- and middle-income country exporters GDP growth in the year. An expansion of High-income exporters credit, rising incomes, and strong worker re- mittance receipts are underpinning private Sources: UN Comtrade database; International Monetary Fund; International Energy Agency; World Bank. consumption, while improvements in business sentiment—both foreign and domestic—along with rising corporate profits, are providing a services for Jordan, Morocco, and Tunisia as a further boost to investment. Despite more re- group jumped to 10.2 percent growth in the strictive monetary policy and progress toward year, in step with a 2.5 percent increment in greater fiscal consolidation in a number of Euro Area demand, setting the stage for im- countries, domestic demand growth has proved output growth. At the same time, a risk picked up, building on the momentum of re- facing the region’s textiles and clothing ex- forms undertaken in recent years. Moreover, porters, as well as many other low- and mid- because of tighter policy conditions, inflation dle-income country exporters, is the coming pressures moderated during the first half of removal of remaining barriers to Chinese ex- 2007 in the larger regional economies of India ports of specific textiles and clothing products and Pakistan. The risks of revived inflation re- (box 1.1). main, in part because of the still incomplete A number of factors are likely to shape the pass-through of high energy prices and up- growth profile for the Middle East and North ward pressures on food prices. Africa region. A softening of OECD demand Current account balances deteriorated in a is anticipated for 2008, although it may be ac- number of countries in 2007, with deficits companied by additional firming of global oil reaching close to 5 percent of GDP in Pakistan prices tied to continued robust demand in and Sri Lanka and about 2 percent in India. emerging markets. This should benefit the oil Pakistan’s current account deficit is a concern, exporters for a time, and should support having deteriorated by the equivalent of more regional growth of 5.4 percent. As the global than 5 percentage points of GDP during the environment improves by 2009, the Middle last four years. In India, monetary tightening East and North Africa region should be able and large capital inflows led to substantial ap- to maintain the broader pace of growth estab- preciation of the rupee over the year, with the lished in 2008 for several more years. Domes- currency reaching a near decade high of Rs tic conditions will vary decidedly across the 39.30 against the dollar by late November 30 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S Box 1.1 Developing country exports in the wake of the removal of barriers to Chinese exports T he system of quantitative restrictions that man- aged rich countries’ imports of textiles and cloth- ing from developing countries for 30 years, especially exports to the EU and the United States expire? In 2006, 19 percent of Chinese exports to the EU and 20 percent of exports to the United States were those produced in China and India (the Multi-Fiber subject to quota restrictions, and exports of these Arrangement), was finally dismantled at the end of products will likely grow significantly after removal 2004, although restrictions for a number of cate- of the quotas. In the EU market, Colombia, the gories of Chinese textile and clothing exports to the Dominican Republic, Mauritius, Peru, and Sri Lanka EU and the United States remained because of appear to be most at risk with more than 40 percent measures that are due to expire in 2008. of their 2006 exports in product categories for which China’s exports of clothing soared 22 percent in China is currently still subject to quotas. For other 2005 and 32 percent in 2006, increasing its market countries, the ratio is between 20 and 40 percent, share in those two years to 24 percent and 28 per- and for Sub-Saharan Africa as a whole stands at cent, respectively, but the impact on competitors has 51 percent, mainly driven by the high exposure of been less drastic than some had feared. The increase Mauritius (74 percent). In the U.S. market, exposure in the size of the world market for clothing has is generally lower: only the Dominican Republic, allowed exports from many other countries to India, and Sri Lanka export more than 20 percent grow, including the Arab Republic of Egypt, India, of their textiles and clothing in categories where Peru, Sri Lanka, and Turkey. In Bangladesh, where Chinese exports are currently subject to quotas. For 1 million jobs were predicted to be lost, exports to most other countries, the ratio is between 5 and the EU and the United States gained continuously 20 percent. However, looking at the impact of the between 2004 and the first four months of 2007. elimination of Multi-Fiber Arrangement quotas in Nevertheless, some countries have seen declines 2004, many competitors managed to defend their in clothing exports that may entail substantial market shares in recent years, and they might be able adjustment. For example, exports to the U.S. and to do so in 2008 as well. EU markets from Brazil, the Dominican Republic, The clothing sector still provides an opportunity Swaziland, and Taiwan (China) declined substan- for export diversification and the expansion of man- tially in 2005 and 2006. With the exception of ufactured exports for low-wage countries, even in Swaziland, clothing exports from these countries the face of unfettered competition from China. The continued to decline into 2007. In addition, for countries best able to expand their exports of cloth- Sub-Saharan Africa as a whole, where the end of the ing will be those that have a supportive business en- clothing sector had been foreseen, exports to the EU vironment, low trade costs (efficient customs, ports, and the United States fell by 7 percent in 2004 and and transport infrastructure), and competitive firms 17 percent in 2005 (on a trade weighted average). In that are flexible enough to meet the changing de- 2006, Sub-Saharan African textile exports to the EU mands of the global buyers that now dominate the grew 3 percent, whereas exports to the United States industry. declined by 6 percent. In 2007, to the extent that At the same time, significant adjustment pressures data are available, Sub-Saharan African textile ex- may arise as more efficient firms expand, while those ports to both the EU and the United States grew unable to compete in the global market decline. In by 7 and 2 percent, respectively. A number of coun- the absence of other employment opportunities, espe- tries, including Madagascar, Mauritius, and Swazi- cially for women, workers made redundant from land, managed to reverse an initial decline in the textile and clothing sector may fall back into clothing exports and return to growth in 2006 or poverty. Minimizing the costs incurred by released early 2007. workers and their families and facilitating their ad- How vulnerable are other countries when the justment into alternative employment will be a major final restrictions on Chinese textile and clothing challenge for a number of developing countries. 31 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 the import bill as oil price gains diminish. Figure 1.14 South Asia growth is slowing Domestic demand is anticipated to revive into as the Indian rupee appreciates 2009, assuming inflation conditions permit Industrial output (annual percentage US$-Rs index some easing of monetary policy in the second change; year-on-year) (January 2005 ϭ 100) 18 110 half of 2008. US$-Rs 108 Growth in Sub-Saharan Africa looks poised 15 Industrial production to remain buoyant by historic standards, 106 12 104 maintaining a growth pace near 6 percent 102 from 2007 through 2009, notwithstanding 9 100 slowing demand in the United States and the 98 6 Euro Area. GDP continued to grow strongly 96 in 2007, with output expanding 5 percent in 94 3 the first half of the year, and is expected to 92 0 90 amount to 6.1 percent for 2007 as a whole. This follows a solid 5.7 percent advance in 06 6 05 5 6 5 07 7 7 00 00 00 00 00 00 20 20 20 .2 2 2 .2 2 2 2006, grounded in sharp gains for regional oil ay p. p. ay n. p. ay n n Se Se Ja Ja Se Ja M M M exporters and South Africa (figure 1.15). Source: World Bank. Global commodity demand and prices were pushed higher in recent years, notably by con- tinued brisk economic expansion in China. Sub-Saharan Africa is one of few regions that (figure 1.14). The initial effects of increased has witnessed a strong supply response to volatility in international credit markets higher oil prices, with crude oil production up during the latter part of mid-2007 led to a fall- 14.3 percent in 2004, an additional 7.6 per- off in equity prices for both India and Pak- cent in 2005, and 8.1 percent in 2006 (when istan, though both countries have recouped Nigeria, which suffered from a number of losses in the interim and returns remain well shutdowns of facilities, is excluded). in the positive territory for the year. In local currency, equity markets are up 36 percent in India (50 percent in dollar terms) and 20 percent in Pakistan (19 percent in dollar terms) as of the end of November 2007. Figure 1.15 Oil exporters drive 2007 Tighter credit conditions, greater market growth results for Sub-Saharan Africa volatility, increased risk of recession in the GDP growth (percent change) United States, and easing growth in the EU 9 will place downward pressures on regional 2006 exports before improvement sets in by 2009. 2005 2007 At the same time, increased competition from 6 China will be a factor in shaping the path of export growth over the next few years, and an additional 18 percent increase in crude oil 3 prices in 2008 will contribute to a marked de- terioration in external balances. On balance, 0 these factors should lead to an easing of Sub-Saharan Oil Oil importers, South Africa regional growth from 8.4 percent in 2007 to Africa exporters excluding the Republic of 7.9 percent in 2008. Growth is projected South Africa to pick up to 8.1 percent in 2009 as external Sources: World Bank and national agencies. demand revives and given easing pressures on 32 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S Improved macroeconomic stability is also coal project in Mozambique, investment in playing an important role in sustaining which amounted to $1.44 billion in the first growth, as is a pickup in both domestic and half of 2007. Madagascar is also experiencing foreign investment. Debt relief in recent years huge investments in its economy. Against this has freed budgetary resources for spending on background, Sub-Saharan African GDP is infrastructure and social programs. A com- anticipated to be sustained at a pace above mon trait across economies is a notable 6 percent through 2008, before slipping to pickup in capital spending focused on the 5.8 percent growth in 2009 as oil exporters transport, telecommunications, and construc- respond to international conditions and re- tion sectors. In addition, recovery from strain output moderately. drought in many areas of the region is trans- lating into improved performance in agricul- ture, adding impetus to growth, while the World trade income effects stemming from several years of high non-oil commodity prices are stimulating private consumption. T he globalization of markets for goods and services is continuing at an unabated pace. Over the past seven years, world trade volumes Recent turbulence in international financial have increased at an average rate of 6.7 per- markets resulted in a moderate depreciation of cent, virtually the same as during the 1990s the South African rand against the dollar, but (table 1.4). Trade volumes are expanding more this followed a period of appreciation of the than twice as fast as industrial production rand because of anticipated capital inflows re- (global GDP has grown 3 percent a year since lated to merger and acquisition activity. Due 2000, up from 2.8 percent a year during to weakness in the U.S. dollar, the nominal ef- the 1990s). In current dollar terms, world fective exchange rate of the rand has returned trade doubled during the 1990s and has dou- to levels prevailing in July, declining 11.2 per- bled again since 2000. cent during the first 10 months of the year. While world trade has grown steadily for the There are as yet no signs of a sharp sell-off of last 15 years, developing country trade has South African assets, and there appears to be accelerated in recent years. During the 1990s, little evidence of marked adverse effects on the developing country export volumes increased domestic growth outlook. at an annual pace of 6.8 percent, roughly the Much of the impetus for regional growth same as the 6.9 percent export gains of the high- over 2008–09 will come from strong domestic income countries. Since 2000, however, develop- demand, notwithstanding softer private ing countries’ exports have been growing twice demand in South Africa, the region’s power- as fast as exports from high-income countries: house, where higher interest rates and an 10.8 percent a year versus 5.1 percent a year. erosion of real incomes are curbing real out- On the import side, the acceleration is even lays. A sharp decline in farmers’ income in more impressive. During the 1990s, developing countries affected by recent floods will consti- countries’ import growth of 5.7 percent a year tute a near-term drag on growth, and on lagged behind that in high-income countries private consumption in particular, although (7.0 percent), but over the last seven years, government and donor transfers and assistance those positions have reversed. In 2006, import may mitigate some of the effects. Investment is growth in developing countries registered expected to remain strong, notwithstanding 14.3 percent, compared with 7.9 percent in the the tightening of international credit condi- high-income countries. Imports across devel- tions and lower commodity prices, in part be- oping regions were growing at double-digit cause of large strategic investments by rapidly rates during 2006, as export revenues, which growing developing economies such as China had been boosted by high-volume growth and and India. A notable activity is the Moatize sharp increases in commodity prices, were 33 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table 1.4 Developments and prospects for world trade and payments Estimate Forecast Growth in percent 1991–2000 2000–05 2006 2007 2008 2009 World trade volume a (growth in percent) 6.8 5.7 9.8 8.7 7.4 9.3 World exports (growth in percent) 6.9 5.7 10.1 9.2 7.6 9.2 High-income countries 6.9 4.3 9.2 8.2 6.3 7.6 OECD high-income 6.8 3.6 8.8 8.7 6.5 7.7 United States 7.1 1.9 8.4 7.8 8.5 9.0 Japan 4.4 5.9 9.6 6.5 4.0 4.3 Euro Area 6.9 3.6 9.0 11.9 7.2 8.6 Developing countries 6.8 10.4 12.7 12.0 11.0 13.1 East Asia and the Pacific 11.7 15.4 17.7 17.8 15.2 18.5 Europe and Central Asia 0.9 9.1 10.3 9.2 8.5 8.7 Latin America and the Caribbean 8.1 5.3 7.8 4.8 5.5 5.8 Middle East and North Africa 4.4 6.1 9.5 4.3 3.8 5.2 South Asia 9.0 11.2 9.0 8.5 8.4 10.5 Sub-Saharan Africa 4.7 5.4 4.4 5.7 7.3 6.6 World imports (growth in percent) 6.7 5.8 9.5 8.3 7.2 9.5 High-income countries 7.0 4.5 7.9 6.8 5.4 7.9 OECD high-income 6.8 4.1 7.4 6.8 5.0 7.8 United States 9.3 4.3 5.9 2.0 1.3 6.8 Japan 3.6 3.9 4.6 3.6 3.0 5.2 Euro Area 6.3 3.4 7.5 10.1 7.4 9.4 Developing countries 5.7 10.1 14.3 12.5 11.9 13.3 East Asia and the Pacific 11.3 13.7 14.8 14.9 14.3 19.2 Europe and Central Asia Ϫ0.9 10.5 14.2 12.8 11.6 10.4 Latin America and the Caribbean 10.7 4.2 13.3 9.2 9.3 8.1 Middle East and North Africa 1.6 9.7 19.1 12.0 10.0 7.4 South Asia 7.9 12.9 12.1 12.1 10.5 11.9 Sub-Saharan Africa 4.4 8.5 12.4 8.2 8.7 8.8 Current account (percent of GDP) High-income countries ؊0.1 ؊0.8 ؊1.1 ؊0.7 ؊0.6 ؊0.5 OECD high-income Ϫ0.2 Ϫ1.1 Ϫ1.9 Ϫ1.5 Ϫ1.4 Ϫ1.2 United States Ϫ1.8 Ϫ4.9 Ϫ6.6 Ϫ6.0 Ϫ5.4 Ϫ5.1 Japan 2.4 3.1 3.9 4.1 3.7 3.8 Euro Area 0.0 0.2 Ϫ0.2 0.4 Ϫ0.1 0.1 Developing countries ؊1.5 1.4 3.6 3.1 2.5 1.8 East Asia and the Pacific 0.1 3.3 8.4 10.1 8.6 7.6 Europe and Central Asia Ϫ1.0 1.4 0.6 Ϫ1.3 Ϫ1.9 Ϫ2.6 Latin America and the Caribbean Ϫ2.6 Ϫ0.6 1.6 0.5 0.1 Ϫ0.2 Middle East and North Africa Ϫ0.3 5.5 9.6 8.2 9.5 6.2 South Asia Ϫ1.6 0.3 Ϫ1.3 Ϫ2.4 Ϫ3.0 Ϫ2.7 Sub-Saharan Africa Ϫ1.9 Ϫ0.3 0.9 0.4 0.9 Ϫ0.2 Source: World Bank. Note: a. Exports and imports of goods and non-factor services in 2000 US$. being expended. The pickup of trade in devel- The rapid growth of trade and production oping countries also shows in their shares of in developing countries, seemingly indepen- world markets: in current dollars, developing dent of growth in the high-income countries, countries’ market share increased gradually in is sometimes referred to as “delinking.” At the the 1990s from 20 to 25 percent, but since same time, the rapid integration of developing 2000, their share has jumped to 35 percent, countries into global markets, a key factor supported in part by higher commodity prices. underlying high growth rates, could also be 34 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S considered as an intensification of the linkage Figure 1.17 Export opportunities for of developing countries to high-income high-income countries countries, as they have become an integral part of the global business cycle. The combi- (Percent) nominal growth in US$, 12-month moving average nation of delinking in terms of growth rates 30 and increased linkage in terms of cyclical Developing-country imports changes in growth gives developing countries 20 a prominent role in the current economic en- vironment: they have become a driving force 10 for global trade, and their strong trade links can help mitigate the slowdown in high- income countries. In 2007 and the years 0 High-income- following, developing countries are expected country exports to be the source of more than half of growth Ϫ10 in global imports. 3 3 3 3 3 3 3 M M M M M M M 94 96 98 00 02 04 06 The shift of import demand away from the 19 19 19 20 20 20 20 United States (and high-income countries gen- Source: World Bank. erally) and toward developing countries is Note: M3 ϭ March. clearly visible in recent high-frequency data. The slowing of high-income countries’ imports and of developing countries’ exports reflects much weaker investment and consumption bust domestic demand, especially in the large growth in the United States in line with the emerging market economies (figure 1.17). fallout in the housing market (figure 1.16). Looking forward, vibrant growth in develop- At the global level, the slowing of U.S. ing countries should offer a cushion from imports has been offset in part by a strength- recessionary conditions in the key OECD ening of import demand across developing economies over the critical 2008 period. countries driven, among other factors, by ro- Indeed, among recent regional develop- ments, dollar-based import growth has been strong: Sub-Saharan African imports increased 23 percent over the year to May 2007; South Figure 1.16 Weak U.S. growth reduces Asian imports jumped 32 percent through Au- demand for developing country exports gust, driven by strong investment and import Growth of investment and imports, four quarter moving demand in India; and Latin America and East average, (percent) Asia were importing at rates of 15 and 14 per- 15 cent, respectively, through September. How- U.S. imports 10 ever, the key contribution to the pickup in im- ports stems from Europe and Central Asia (an 5 increase of 28 percent through September, up 0 from 20 percent a year earlier), where in Cen- tral and Eastern Europe, EU accession coun- Ϫ5 tries are increasing their import potential in Ϫ10 U.S. investment dollars with currencies effectively pegged to an appreciating euro, while in the CIS, exporters Ϫ15 of oil and other hydrocarbons continue to 99 00 01 02 03 04 05 06 07 spend portions of their accumulated revenues. 19 20 20 20 20 20 20 20 20 Source: World Bank. Such rotation of trade growth is contribut- ing to an unwinding of global imbalances that 35 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 1.18 U.S. current account narrows Inflation and commodity over 2007 and is likely to continue markets doing so U.S. current account components ($ billions, three quarter moving average) I n high-income countries, inflationary pres- sures were sufficiently under control during 2007 to allow central banks to end a period of 50 monetary tightening. In the United States, the 0 Federal Reserve had become more concerned about a possible recession than about acceler- Ϫ50 ating inflation and lowered Federal funds by 50 basis points to 4.75 percent on September Ϫ100 18—the first reduction in four years. A further 25 basis point cut was enacted on October 31 Ϫ150 and a like reduction on December 11, carrying Ϫ200 Federal funds to 4.25 percent. In Japan, infla- tion is not yet permanently in positive territory, Current account Ϫ250 making it unlikely that the Bank of Japan will Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 2000 2001 2002 2003 2004 2005 2006 2007 follow its initial tightening steps with further increases in interest rates. In Europe, inflation Income Services Non-oil balance is fluctuating around the European Central Oil balance Transfers Bank’s upper target, recently with more up- Source: U.S. Department of Commerce. ward than downward momentum. Given ex- pectations for softening growth in 2007, as well as an appreciating currency, the European Central Bank will probably hold its policy rate at 4 percent. started in 2006. The U.S. current account The inflation picture is more diverse across deficit declined from a peak of 6.8 percent of developing countries. In several rapidly grow- GDP in the fourth quarter of 2005 to 5.5 per- ing economies, where inflation had picked up cent by the second quarter of 2007. The over the last two years, policy interest rates shrinking deficit reflected weaker U.S. imports, have been increased gradually. This occurred caused in part by the housing slump, and across South Asia (India, Pakistan, and Sri stronger exports, supported by demand in de- Lanka), where signs of overheating became veloping countries and the falling dollar (fig- evident, and also in several Latin American ure 1.18). The mirror image of the narrowing and Caribbean countries (Argentina, Chile, U.S. current account may be found in develop- Colombia, and the República Bolivariana de ing countries, as well as selected OECD coun- Venezuela). China and the Czech Republic are tries, where surpluses are broadly in decline. examples of economies where monetary tight- Based on the strong correlations shown in fig- ening continues. But in some countries ure 1.16, export revenues in developing coun- (Belarus, Brazil, the Lao People’s Democratic tries are likely beginning to slow in line with Republic, and the Philippines) inflation eased the softening of import demand in the high- and monetary policy, which was tight, is now income countries. At the same time, spending loosening moderately. In several countries in developing countries remains strong. Such monetary policy has reversed. In Hungary and gradual unwinding of global imbalances is Turkey, for example, policy rates were cut in expected to continue, at least through 2009, as 2007 after being on a long uptrend. This turn- oil price levels decline, driven by the same about was a reaction to the recent slowdown elements that emerged in 2007. in growth after a long period of strong gains 36 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S in domestic demand that led to large current Figure 1.20 Inflation is broadly stable account deficits and inflation pressures. elsewhere, though at high levels Inflation has remained remarkably muted after four years of global growth that has been Consumer prices (percent change, year-on-year) 9.0 stronger than that experienced in the last Latin America South Asia 30 years. Average consumer price inflation in 7.5 high-income countries registered 1.8 percent in 2007, slightly below that experienced dur- 6.0 ing the downturn of 2001. Median inflation in developing countries registered a moderate (in 4.5 a historic context) 5.9 percent, only 0.6 per- centage points higher than at the beginning of 3.0 Europe and Central Asia the decade. Hyperinflation, once a trademark East Asia 1.5 of several developing countries, has been elim- 02 2 03 4 05 5 06 7 00 00 00 00 inated, with Zimbabwe now being the notable 20 20 20 20 .2 2 .2 2 n. l. r. n. l. r. ct ct Ju Ju Ap Ap Ja Ja O O exception. The number of developing coun- tries with double-digit inflation has halved Source: World Bank. since the beginning of the decade.6 Inflation was lower in the first half of 2007 than it was in the previous year in more than 60 percent Africa, inflation is volatile, but is trending of all countries, and among the 56 developing higher, reflecting rising food prices, and the countries for which inflation data are avail- Middle East and North Africa region shows a able for the first half of 2007, more countries clear uptick in inflation, likely triggered by the experienced an easing than a pickup of pres- expenditure of burgeoning oil revenues in the sures. Moreover, average inflation is still on region, notably in the Islamic Republic of the rise in just two of six developing regions Iran. In other regions, inflation is volatile, but (figures 1.19 and 1.20). In Sub-Saharan broadly trending flat or slightly downward. Developing countries have played an important part in restraining inflation Figure 1.19 Inflationary pressures are worldwide. Improved macroeconomic policies rising in the Middle East and North have tended to reduce domestic pressures on Africa and Sub-Saharan Africa inflation across a wide range of countries. Consumer prices (percent change, year-on-year) Independent monetary policy, more cautious 9.0 fiscal stances, strong currencies, and rapid Sub-Saharan Africa 7.5 TFP growth have increasingly kept domestic inflation under control. In addition, greater 6.0 engagement in international trade and compe- 4.5 tition has helped spread price restraint across trading partners. In many countries, passing 3.0 cost pressures through to output and to con- 1.5 sumer prices has become progressively more Middle East and North Africa difficult. 0 The lack of pass-through, in particular, has Ju 02 Ja 002 Ju 03 Ja 003 Ju 06 Ja 006 Ju 04 Ja 004 Ju 05 n. 5 07 enabled monetary policy in the high-income Ja 00 20 20 20 20 20 20 2 2 2 2 2 n. l. n. l. l. n. l. n. l. n. countries to remain fairly passive in the face of Ja Source: World Bank. rising non-core prices. Partly as a conse- quence, global growth has been maintained at 37 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 1.21 Commodity prices continued Figure 1.22 Copper, zinc, and aluminum gains through 2007 led by metals prices sharply affected by China Commodity price indexes (January 2003 ϭ 100) $/metric ton 350 Metals 9,000 Copper 8,000 300 7,000 250 6,000 Crude oil 5,000 200 4,000 150 3,000 2,000 100 Agriculture Aluminum 1,000 Zinc 50 0 00 01 02 03 04 06 05 07 00 01 02 03 04 05 06 07 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 1, 1, 1, 1, 1, 1, 1, 1, 3, 3, 3, 3, 3, 3, 3, 3, n. n. n. n. n. n. n. n. n. n. n. n. n. n. n. n. Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Source: World Bank. Sources: London Mercantile Exchange and World Bank. a higher rate much longer than in the past, copper, have experienced sharp gains, while generating increasing capacity constraints in those for which China is a net exporter— commodity markets. As a result, commodity mainly aluminum and to some extent zinc— prices continued to increase and remained ele- have increased much less (figure 1.22). Follow- vated into the fourth quarter of 2007. Com- ing the global credit squeeze in August and modities have become more volatile, however, September, the prices of metals dropped more and the increase in several commodity prices is than 10 percent (metals tend to be particularly now moderating (figure 1.21). sensitive to slowing economic activity and The increased use of food crops for pro- may have been exposed to speculative pres- duction of biofuels is an important factor that sures when investors closed their positions to led to large increases in the prices of vegetable finance other losses in their portfolios). The oils and grains in 2007, which in turn con- prices of metals are generally expected to peak tributed to an overall 15 percent increase in in 2007, to decline by 5 percent in 2008, and the index of agricultural prices and a 20 per- to continue lower into 2009 as rising capacity cent rise in food prices. The latter is of special tips markets into surplus. concern for poor consumers in developing Nominal oil prices, measured in dollars, countries. broke historic records in November, reaching The prices of metals have increased more nearly $100 a barrel. Measured in euros, oil than other commodity prices over the last four prices stood 4.5 percent above their 2006 years, largely because of especially strong peak, while in real terms (corrected for overall demand in China. Underinvestment during inflation) oil prices remain 4.2 percent below earlier periods of low prices and numerous the peaks reached in November 1979. supply problems and delays in bringing on new Higher oil prices have reduced growth in capacity have also played a part. Shortages of global oil demand, particularly in high-income equipment and skilled workers have signifi- countries. Oil demand in the OECD declined cantly increased development costs, and ore for six consecutive quarters beginning in the grades are deteriorating. The price of metals fourth quarter of 2005, with an average drop of for which China is a net importer, especially more than 0.4 million barrels a day (figure 1.23). 38 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S Figure 1.23 Growth in the world’s demand Figure 1.24 OPEC reduces output to for oil slows support prices Millions of barrels of oil/day Millions of barrels of oil/day 4.5 5 4.0 World Demand 4 World supply 3.5 3.0 3 2.5 2 2.0 1 1.5 1.0 0 0.5 Ϫ1 0 Ϫ2 Ϫ0.5 Ϫ1.0 Ϫ3 01 01 00 03 06 00 03 06 04 05 04 05 02 07 02 07 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Other Other Asia China OECD OPEC Other Former Soviet Union Sources: International Energy Agency and World Bank. Sources: International Energy Agency and World Bank. In non-OECD economies, the demand for oil upstream investment in oil-producing coun- has grown by just over 1 million barrels of oil tries (both in OPEC and in non-OPEC coun- a day since 2005, down sharply from the surge tries) should result in new capacity that ex- of 2004. Supply in several producers that are ceeds the growth in oil demand. Nevertheless, not members of the Organization of Petroleum oil markets are expected to remain finely bal- Exporting Countries (OPEC), especially anced over 2007–09, in part because of pro- Russia and countries in western Africa, has in- duction discipline by exporters, and prices are creased in recent months, and among OECD expected to remain above $75 a barrel for the countries, Canadian production continues to coming two years. In the longer term, the oil grow, predominantly from oil sands, while market balance is expected to loosen and significant new output in the deep water U.S. prices are projected to fall toward $50 per part of the Gulf of Mexico is starting up. These barrel. increases have been partially offset by moder- The rise in agricultural prices during 2007 ately falling production in the North Sea. As was underpinned by strong demand for food demand eased and non-OPEC supply in- imports, especially by oil-exporting countries, creased, OPEC countries reduced their output which contributed to a 20 percent increase in to prevent further increases in stocks and a fall global food prices for the year. Higher cocoa in prices (figure 1.24). and robusta coffee prices raised beverage Because OPEC has limited spare capacity prices by 13 percent, while raw materials and is holding down production, oil prices prices were moderately higher (figure 1.25). will likely remain quite elevated and volatile; The increase in food prices was led by fats and however, high prices and increasing environ- oils, up 50 percent for the year, and grains, up mental concerns should continue to moderate 22 percent (figure 1.26).7 Among other com- growth in demand. At the same time, rising modities, sugar prices declined 32 percent, as 39 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 stocks, and droughts. Biofuels are playing an Figure 1.25 Agricultural prices surge over increasingly important role in agricultural 2006–07 commodity markets as their share of global Commodity price indexes (2003 = 100) production and trade increases. In 2006, bio- 175 Raw materials fuels accounted for 5–10 percent of the global Beverages production of the primary biofuel feedstocks 150 Food and up to 77 percent of the volume of trade. 125 Among the largest biofuel producers, the United States used 20 percent of its maize pro- 100 duction for biofuels; Brazil used 50 percent of its sugarcane for biofuels; and the EU used 75 68 percent of its vegetable oil production, primarily rapeseed, and also imported addi- 50 tional vegetable oils. Such large usage reduces 1 0 3 6 2 4 5 7 00 00 00 00 00 00 00 00 supplies of these crops for food and feed and ,2 ,2 ,2 ,2 ,2 ,2 ,2 ,2 .1 .1 .1 .1 .1 .1 .1 .1 n n n n n n n n has contributed to substantial price gains Ja Ja Ja Ja Ja Ja Ja Ja Source: World Bank. (box 1.2). The anticipated spike in grains prices, iden- tified as a concern in the World Bank’s Global Development Finance report published in Figure 1.26 A rise in food prices, led by a May 2007 (World Bank 2007a), has largely ramp-up of the prices of fats, oils, and materialized. Monthly wheat prices have in- grains creased 90 percent since mid-2007. Wheat Commodity price indexes (1990 = 100) stocks are expected to fall to record lows rela- 200 tive to consumption, and prices may increase Fats and oils 175 further in 2008 before production recoups enough to rebuild stocks. In the meantime, a 150 large number of food-importing countries Grains 125 may suffer substantial terms-of-trade losses over the course of 2007 and into 2008 (box 100 1.3). Price increases for vegetable oils and 75 Other foods grains primarily affect low-income countries, with the rise in prices since the end of 2004 50 leading to a terms-of-trade loss equivalent to 0 1 2 3 4 5 6 7 00 00 00 00 00 00 00 00 0.5 percent of GDP. This represents 1 percent ,2 ,2 ,2 ,2 ,2 ,2 ,2 ,2 .1 .1 .1 .1 .1 .1 .1 1 n. n n n n n n n of GDP in 29 countries, and nearly 5 percent Ja Ja Ja Ja Ja Ja Ja Ja Source: World Bank. of GDP for the most affected country, Eritrea. The impact on middle- and high-income coun- tries is considerably less because imports of growing conditions in India, Pakistan, and these commodities represent a smaller share of Thailand improved, and new plantings and fa- trade, and higher prices on other commodity vorable weather boosted Brazilian production. exports tends to offset terms-of-trade losses Food prices have risen nearly 75 percent resulting from higher food prices. Agricultural since their lows of 2000. The increases stem prices are expected to remain nearly flat at partly from the stepped-up use of food crops for high levels in 2008, as biofuels production biofuels and partly from other more fundamen- continues to ramp up in response to consump- tal factors, such as rapid income growth in de- tion mandates and production subsidies, veloping countries, high fertilizer prices, low drawing resources from other crops. 40 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S Box 1.2 Biofuels B iofuels are not new: the first Ford automobile was originally intended to run on ethanol. How- ever, the interest in biofuels has increased in recent levels to improve engine performance. One of their greatest advantages is that they can be used in con- ventional gasoline and diesel engines without modifi- years along with increases in energy prices and cation of the engines and can be dispensed through heightened concern about the environment. Coun- existing distribution channels. tries want not only to achieve greater energy security, Nevertheless, their use has some limitations. but also to reduce the use of fossil fuels to lower Ethanol can be used in conventional gasoline engines greenhouse gas emissions and improve air quality. only up to about a 10 percent blend with gasoline The demand for biofuels also got a boost when without engine or fuel system modifications. It also methyl tertiary-butyl ether was banned as a fuel requires special handling in transport to prevent con- additive to meet clean air regulations in many U.S. tamination. Specially designed flex-fuel engines can states and localities and for fear it was contaminat- use a wider range of blends of ethanol and gasoline ing groundwater. The political gain attached to sup- and are available in Brazil and the United States. porting new demand for agricultural products, and Biodiesel fuel can be used in any blend with fossil thus enhanced crop prices, has added to interest on fuel diesel in standard diesel engines, but its use is the part of politicians and encouraged generous sup- limited in colder climates. The energy content of port policies in many countries, including EU coun- ethanol is lower than that of gasoline, providing tries and the United States. about 20–30 percent fewer miles per gallon than Biofuels can be produced from a variety of gasoline, while biodiesel provides 5–10 percent feedstocks. Current technology, often called first- lower mileage than diesel. generation technology, relies primarily on food crops While biofuels have thus far had little impact on such as sugarcane and maize to produce ethanol and crude oil prices, they have already had large effects on vegetable oils from rapeseed, soybeans, palms, on prices of commodities used as feedstocks for bio- and other crops to produce biodiesel fuel. So-called fuels, as well as for competing crops. For example, second-generation technology may be able to pro- maize prices rose by about 60 percent from mid- duce biofuels from an even wider range of feed- 2005 to mid-2006, largely because of the increased stocks, such as switch grass, timber waste, and use of maize for ethanol production in the United municipal garbage, but such technology is not yet States. This prompted a huge shift of land from commercially viable and many experts do not expect wheat into maize in the following season, which it to become so for at least a decade. contributed to a sharp increase in wheat prices. Global production of biofuels totaled about Vegetable oil prices have also increased because of 45 billion liters in 2006, representing slightly more their stepped-up use for biodiesel production in than 1 percent of global road transport fuels on an Europe and the United States, with palm oil prices energy equivalent basis. Biofuels can be used to re- up 48 percent in the last year and soybean oil prices place their fossil fuel counterparts or can be blended up 25 percent. These price shifts have set off a food with fossil fuels to achieve certain benefits, such as versus fuel debate that is causing some to question reduced tailpipe emissions and increased octane the contribution of biofuels. Risks and uncertainties: downward spiral in housing is mitigated by strong export growth. On the financial side of Danger of a banking crisis and the economy, the projections assume that a U.S. recession losses on holdings of asset-backed securities T he baseline projections assume, on the real side of the economy, that the U.S. housing recession does not spill over in a large-scale are widely distributed and that interventions by the Federal Reserve, the European Central Bank, and other institutions restore calm to way to the rest of domestic demand, as the financial markets. However, the effective cost 41 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Box 1.3 Policy responses to rising food prices H igher prices of imported staples, strong growth of domestic and regional demand that pushes up prices of domestically produced goods, and in- ment reoriented its large public food distribution system away from mass distribution in favor of a targeted safety net program for the poor. Such a creased prices of production inputs such as fertilizers response would be effective in the current situation and energy are causing rapid rises in food prices in of high food prices, but a complicating factor is that many countries. The price increases will hurt the part of the current price increases might be more poor, who spend a large share of their income on persistent than in the past. food, but will also help the rural poor who produce Past periods of food price increases were tempo- a marketable surplus. Governments are under pres- rary and lasted only two or three years, such as the sure to take action to blunt the impact of higher increases during the 1970s or the more recent in- food prices, but many countries have liberalized or creases in 1995–96; however, the current increases partially liberalized their domestic food markets and have a structural component that may persist be- imports (Bangladesh, Brazil, Egypt, India, Mali, cause it is closely tied to the rise in global energy Morocco, Russia, Ukraine, and the Republic of prices. If energy prices remain high, food crop prices Yemen, to name a few) and no longer have policy are unlikely to decline significantly. Over the longer instruments to control food prices. Those countries term, supplies of food are expected to increase and that have targeted safety net programs can rely on prices to fall, but the current price increases are ex- those channels to provide assistance to the poorest pected to continue for several years, and thus most people, but countries without safety net programs countries will not be able to shelter their consumers will feel pressure to impose price controls or to rein- from them. Current food price increases also have a troduce government controls. This would undo suc- temporary component caused by low stocks and pro- cessful policy reforms and send a negative message to duction shortfalls stemming from drought. These can the private sector. be expected to dissipate as supplies respond to high Bangladesh offers an example of the success of prices. Countries should aim to protect consumers open market food policies. It has transformed its from temporary price increases caused by shortages, agricultural sector into one of the most productive in but few countries can afford to protect consumers South Asia. The country is largely self-sufficient in against structural changes in food prices. rice, a basic staple, and is an emerging exporter of Consumers in food-exporting countries are also see- high-value agricultural products. One of the keys to ing their food prices increase as supplies are exported this success was the government’s decision to liberal- at high international prices, and several countries have ize food imports in the early 1990s. Private traders imposed export bans to contain domestic food price imported food grains during times of domestic short- inflation. Such bans unfairly penalize the producers of fall, providing needed supplies and price stabiliza- these crops and may encourage smuggling and corrup- tion, as well as removing a financial burden from the tion. A more appropriate policy response is to provide government. By 2000, the private sector was import- a targeted safety net program for the poor while allow- ing 100 percent of imported food, and the govern- ing exports to continue unfettered. of capital is likely to increase further, reflected Should unexpected and large-scale new in tightened credit criteria for firms as well as losses occur in financial markets— households in the United States. Elsewhere, concentrated among commercial and invest- however, tightening is expected to be more ment banks or among major investors—credit moderate. Under such conditions, weakness in conditions globally could tighten much more. U.S. housing would continue, but the contrac- Such a scenario would tend to increase losses tion in residential investment will have bot- on asset-backed securities, potentially carrying tomed out by mid-2008. financial markets and the real economy into a 42 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S downward spiral and requiring an aggressive The repercussions for low-income coun- loosening of monetary policy. tries could also be sizable, as weaker global Under such circumstances, contraction in demand for commodities (metals, agricultural quarterly GDP in the United States would be- products, and fuels) could worsen their terms come more likely, pushing growth in 2008 to of trade by 2 percent of GDP, and the pace of 1 percent, or almost half of baseline growth. expansion could decline by 0.6 points in 2008. Equity markets in high-income countries Overall, given such a scenario, global growth would likely decline substantially, and the ef- might decline by three-quarters of a percent- fective cost of capital could increase by some age point in 2008 compared with the baseline. 200 basis points in 2008, compared with the The loosening of monetary policy in re- baseline. Such a pronounced credit crunch sponse to the subprime crisis might also would be reflected in a sharp decline in U.S. cause growth to overshoot. As a result, com- business investment, declining employment, modity markets could tighten further; infla- weaker consumer outlays, and a prolonged tionary pressures would mount, especially in period of depressed consumer prices. developing countries; and financial imbal- Adverse developments in the United States ances would increase rather than recede. would spill over to the rest of the world Such a scenario could sow the seeds of a through weaker U.S. imports and a substan- much sharper growth slowdown in the tial further decline in the dollar, spurred by medium term and illustrates the challenge an aggressive loosening of monetary policy. facing monetary authorities in both high- The spillover could be exacerbated by a re- income and developing countries. versal of the yen carry trade and a reduced appetite for U.S. assets among international investors as growth slows and assets of fi- Long-term prospects and nancial institutions become more risky. poverty forecasts Largely because of reduced exports and in- vestment growth, GDP growth in Europe and A potential for catching up Japan could fall to 1.5 and 1.3 percent, Beginning in the mid-1990s, per capita income respectively, about half a percentage point growth in developing countries has acceler- below the baseline. ated, with growth being particularly vibrant For a number of middle-income countries, since 2000. Several factors suggest that this the most important transmission channel of high growth will be sustained over the longer effects stemming from the OECD countries term. First, economic policies are on a more would be a tightening in international credit solid footing than in earlier periods, with both conditions, which would cut into investment inflation and fiscal deficits broadly under con- and reduce growth. Middle-income economies trol, and structural policies more conducive to with large current account deficits and coun- taking advantage of more open global mar- tries whose currencies are pegged to the euro kets, and a business climate more favorable would likely feel the greatest effects. Growth for investment. Second, many countries have in middle-income countries would fall a per- entered, or are entering, a period of demo- centage point below the baseline; however, the graphic transition that combines rapid labor impact would be quite diversified, in part force growth with declining dependency ratios. depending on how economies are linked This shift provides a window of opportunity financially to the U.S. dollar. Central Euro- for rapid economic gains. Third, the income pean economies that accumulated euro- disparity between developing and developed denominated debt will be more vulnerable countries is still large, but with broader access than countries that hold dollar debt. to information and technology-laden capital 43 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 and imports, developing countries have the a relatively optimistic growth scenario, the ability—and the incentive—to narrow this gap. gap between rich and poor countries will re- The long-term forecast for 2010–30 pro- main extremely wide. The average citizen in a jects sustained growth across developing developing country is projected to earn only countries, albeit with a moderating trend (fig- 7.8 percent as much as a citizen of a high- ure 1.27). For developing countries as a whole, income country, a ratio that should rise to per capita growth is expected to ease from an about 10.0 percent by 2030. average of 3.9 percent in the first decade of This year’s long-term scenario represents a the 2000s to 4.5 and 3.4 percent in the second significant upward revision from last year’s and third decades, mainly reflecting slowing long-term forecast. The revision reflects a con- growth in the East Asia and the Pacific region. fluence of factors, including the simple recog- Sub-Saharan Africa could see a slight accelera- nition that developing country growth has tion, with average per capita income growth of accelerated over the last decade and has been 3.0 percent in the current decade, increasing to broadly based and sustained. Among the a more sustainable 3.2 to 3.4 percent in subse- factors that likely contributed to sustaining quent decades. This is a substantial improve- this high level of growth is the relatively rapid ment over the 1980s and 1990s, when per convergence in technological achievement capita incomes in Sub-Saharan Africa declined. between high-income countries and develop- Years of sustained increases in per capita ing countries (see chapter 2). This progress is incomes should see average real incomes projected to continue over the next 20 years, (stated in 2001 prices) more than double by and the returns to knowledge and capital will 2020, rising from $1,300 in 2001 to $2,800 remain more or less constant. These sustained by 2020. By 2030, they are projected to reach returns combined with rising incomes will nearly $4,000. However, significant variation translate into increased investment in educa- will occur around these numbers, and despite tion and research and development, helping to Figure 1.27 Long-term growth, 1980–2030 Annual per capita GDP growth (percent) 10 2001–10 8 1991–2000 2011–20 1981–90 2021–30 6 4 2 0 Ϫ2 tri e tri e- na a a ia l A nd ci d be d ric d un om di ric As un dl Pa an ib an Af an hi es es In tra e a a fic an a Af co mid C co -inc si h e a ar a th t or as en p n ut th Asi C ic C uro ra h m nd e er So N E ig ha st th Am e co a E H dl Ea Sa in w- e id tin Lo b- M La Su Source: World Bank data and simulations with the Linkage model. 44 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S Figure 1.28 Declining capital-led growth Figure 1.29 Sustained high productivity for developed countries, 2002–30 growth for developing countries Growth decomposition (percentage contribution per year) Growth decomposition (percentage contribution per year) 3.5 8.0 3.0 7.0 2.5 6.0 2.0 5.0 1.5 4.0 1.0 3.0 0.5 2.0 0 Ϫ0.5 1.0 Ϫ1.0 0 02 12 22 02 12 22 07 17 27 07 17 27 20 20 20 20 20 20 20 20 20 20 20 20 Capital Labor TFP Capital Labor TFP Source: Simulation results from the Linkage model. Source: Simulation results from the Linkage model. Note: TFP ϭ total factor productivity. Note: TFP ϭ total factor productivity. establish a virtuous cycle of further technolog- drivers of technological diffusion and absorp- ical progress and increased incomes. Those tion in developing countries have strengthened. countries where technological progress has However, as stressed there, the realization of stagnated are expected to benefit from a sup- this potential during the coming decades will portive global environment characterized by depend on the extent to which countries, espe- accelerating exports and continued strong cially low-income countries, can strengthen income gains from commodities, partly ex- their technological absorptive capacity and plained by the growing importance of devel- remain open to new technology flows. oping countries in global growth. Part of the strong projected performance for Poverty declines significantly in the developing countries derives from stronger baseline, though not uniformly labor force growth, but much can be attrib- The upward revisions to the long-term fore- uted to technological progress, measured in fig- cast generate a more positive poverty forecast ures 1.28 and 1.29 by TFP growth. The strong for 2015, albeit a modest improvement com- TFP growth in developing countries of the last pared to the forecast presented in the Global several years is consistent with the findings in Monitoring Report for 2007 (World Bank chapter 2 of this report, which suggest that 2007b). The percentage of the population in (based on a different measure of technology) developing countries living on less than $1 a the technology gap between middle- and high- day in 2015 under the current long-term fore- income countries has narrowed over the last cast is 10.2 percent, down from 11.8 percent 10 years. Over the forecast horizon, the rela- in the Global Monitoring Report (table 1.5). tive strength of TFP growth in developing The rapid improvements in reducing poverty countries is expected to persist, which is also in Asia since 1990 imply that the target of consistent with the finding in chapter 3 that the halving the percentage of the poor living on 45 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table 1.5 Poverty in developing countries by region, selected years Region or country 1990 2004 2015 Number of people living on less than $1/day (millions) East Asia and the Pacific 476 169 40 China 374 128 29 Rest of East Asia and the Pacific 102 41 11 South Asia 479 446 256 India 376 371 217 Rest of South Asia 103 76 39 Europe and Central Asia 2 4 2 Middle East and North Africa 5 4 2 Sub-Saharan Africa 240 298 290 Latin America and the Caribbean 45 47 34 Total 1,247 970 624 Excluding China 873 841 595 Number of people living on less than $2/day (millions) East Asia and the Pacific 1,113 684 296 China 819 452 186 Rest of East Asia and the Pacific 294 232 110 South Asia 954 1,116 997 India 734 868 772 Rest of South Asia 220 248 226 Europe and Central Asia 20 46 16 Middle East and North Africa 49 59 38 Sub-Saharan Africa 396 522 567 Latin America and the Caribbean 115 121 102 Total 2,647 2,548 2,017 Excluding China 1,828 2,096 1,831 Percentage of the population living on less than $1/day East Asia and the Pacific 29.8 9.1 2.0 China 33.0 9.9 2.1 Rest of East Asia and the Pacific 22.1 7.1 1.6 South Asia 43.0 30.8 15.1 India 44.3 34.3 17.6 Rest of South Asia 38.9 20.6 8.5 Europe and Central Asia 0.5 0.9 0.3 Middle East and North Africa 2.3 1.5 0.7 Sub-Saharan Africa 46.7 41.1 31.4 Latin America and the Caribbean 10.2 8.6 5.5 Total 28.7 18.1 10.2 Excluding China 27.1 20.7 12.6 Percentage of the population living on less than $2/day East Asia and the Pacific 69.7 36.6 14.5 China 72.2 34.9 13.4 Rest of East Asia and the Pacific 63.7 40.4 16.9 South Asia 85.7 77.1 59.0 India 86.4 80.4 62.7 Rest of South Asia 83.4 67.6 49.2 Europe and Central Asia 4.3 9.8 3.4 Middle East and North Africa 21.7 19.7 10.3 Sub-Saharan Africa 77.1 72.0 61.5 Latin America and the Caribbean 26.3 22.2 16.3 Total 60.8 47.6 32.9 Excluding China 56.8 51.6 38.7 Source: World Bank. 46 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S $1 a day or less between 1990 and 2015 will environmental degradation caused by global be achieved at the global level, though not nec- climate change or insufficient investment in essarily at the country or regional level. The new and locale-specific varieties of crops. new forecast leads to some improvement in To illustrate the sensitivity of future out- the outlook for Sub-Saharan Africa, but the comes to the possibility of weaker agricultural region is still significantly off target.8,9 productivity performance, an alternative sce- nario looks at the impact on global growth, Agricultural productivity has important incomes, and poverty from assuming zero poverty implications for low-income agricultural productivity growth over the pe- countries riod 2008–15 in the two largely low-income Agricultural technology is a particularly im- regions of South Asia and Sub-Saharan portant determinant of overall technology and Africa.10 One key result would be higher poverty reduction in low-income countries prices for agricultural produce compared with (World Bank 2007c), mainly because in most the baseline. Agricultural producer prices in economies the majority of workers remain in Sub-Saharan Africa would increase around agriculture, and the poor are concentrated 6 percent, with a more modest increase of in rural areas. Moreover, productivity growth 2 percent for processed food. The increase in in agriculture is one of the main drivers of prices is more acute in South Asia: around rising incomes in agricultural economies. 11 percent for primary agriculture, with a Increased agricultural productivity frees up 4 percent increase in processed foods. These workers to take on more lucrative manufac- increases lead to a loss of competitiveness in turing jobs and reduces food costs relative to both domestic and export markets. wages. Moreover, by increasing yields, high In the case of Sub-Saharan Africa, imports agricultural productivity generates a mar- of crops and livestock products rise by some ketable surplus that can be used to purchase 40 percent in 2015 relative to the baseline and higher-quality inputs for production and exports drop by 30 percent. Overall output consumer goods, which in turns leads to a vir- declines by some 12 percent. Agricultural tuous cycle between the agricultural and labor demand barely changes, as the decline in nonagricultural sectors of the economy. The output is offset by a decline in productivity, marketable surplus can also be used to in- leaving overall labor demand more or less un- crease exports or to reduce food imports. changed, albeit with depressed wages. In In the baseline scenario, agricultural pro- South Asia, labor demand actually increases. ductivity is projected to increase by a uniform The output impact is a more modest drop of 2.5 percent a year (Martin and Mitra 1999). 9 percent, and the loss of productivity is re- Historically, however, not all countries have flected in an overall increase in labor demand achieved this average increase. For example, of 1 percent, and thus less rural-to-urban the green revolution that lifted agricultural migration occurs. The difference between the productivity in South Asia over the last two regional impacts is linked to the degree of 40 years largely bypassed Sub-Saharan Africa, autonomy of their respective agricultural and where yields have largely stagnated. Looking food markets. A greater share of Sub-Saharan ahead, agriculture in Sub-Saharan Africa is Africa’s agricultural output is exported and a faced with some of the same challenges as in greater share of its demand is imported. The the past, for example, lack of access to credit increase in domestic producer prices will and poorly integrated markets. Both South therefore be dampened by external markets in Asia and Sub-Saharan Africa could be facing Sub-Saharan Africa, compared with the additional challenges that will threaten future more self-sufficient markets in South Asia.11 gains in agricultural productivity, for instance, South Asia therefore witnesses more price 47 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 adjustment and less volume adjustment rela- aggregate figures in this chapter, are Algeria, the Arab tive to Sub-Saharan Africa. Republic of Egypt, the Islamic Republic of Iran, Jor- dan, Lebanon, Morocco, Oman, the Syrian Arab Re- Lower agricultural productivity, higher public, Tunisia, and the Republic of Yemen. Low- and prices, and lower wages for unskilled workers middle-income economies with insufficient data for increase poverty in both South Asia and Sub- coverage are Iraq, Libya, and the West Bank and Gaza. Saharan Africa. In Sub-Saharan Africa, overall High-income countries of the region, which are ex- consumer prices rise by 1.4 percent and food cluded from aggregates in the chapter, are Bahrain, prices by 4 percent. In South Asia, the in- Kuwait, Qatar, Saudi Arabia, and the United Arab creases are even more marked: 10 and 3 per- Emirates. 5. Changes in the volume of oil and gas production cent, respectively. Combined with a significant have been modest in recent years, ranging from 0.5 to fall in wages for the unskilled, which creates a 1.0 percent annual gains in Algeria to a decline in the sharp drop in food wages (the quantity of Islamic Republic of Iran and the Republic of Yemen. food that can be purchased with the average Hence the buildup in export revenues is largely due to wage) that affects the poorest the most, the the large-scale increases in global oil prices during poverty headcount index in Sub-Saharan 2005 through 2007. Africa would increase by some 5 percentage 6. Inflation now exceeds 10 percent in Angola, Argentina, Botswana, Costa Rica, Ghana, Haiti, points in 2015 relative to the baseline, even Indonesia, the Islamic Republic of Iran, Kenya, though the average income loss would be a Madagascar, Malawi, Mozambique, Sri Lanka, more moderate 3 percent, suggesting that the República Boliviarana de Venezuela, and Zimbabwe. loss in agricultural productivity harms the 7. Among individual vegetable oils, palm oil was poor, on average, more than others.12 up 48 percent, coconut oil was up 41 percent, and soy- bean oil was up 25 percent. Among individual grains, maize prices rose 33 percent and wheat prices in- creased 30 percent. Notes 8. Even though the revisions to the long-term fore- 1. Carry trade is an approach undertaken to lever- cast imply roughly a doubling of per capita growth for age investments in higher-yielding securities intermedi- Sub-Saharan Africa, that growth will have more im- ated through a low-interest cost center. For example, a pact after 2015 than before, as recent poverty forecasts purchase of emerging market equities or fixed income have already incorporated the strong upward trend in securities through borrowing in yen at low Japanese in- per capita growth rates since the end of the 1990s. terest rates and converting yen to local currencies to 9. The poverty numbers presented here do not yet complete the transaction would be classified as a carry take into account the results of the recent International trade. Even though estimates of funds intermediated Comparison Project, which will provide an updated set through the yen carry trade are highly uncertain, an in- of price levels across countries. New purchasing power dicator of their potential size can be discerned from the parity exchange rates could—although not necessarily substantial weakness of the yen-dollar exchange rate will—lead to a new set of poverty estimates. during 2006–7, when it fell some 5.8 percent. 10. These projections involved six modeled coun- 2. A full analysis of recent developments and the tries or regions—Bangladesh, India, Pakistan, the rest outlook for each region is available on the World of South Asia, Nigeria, and the rest of Sub-Saharan Bank’s Web site at http://www.worldbank.org/ Africa excluding South Africa. prospects. 11. One plausible explanation for South Asia’s 3. China is the largest overseas holder of U.S. greater self-sufficiency has been its higher agricultural mortgage-backed securities, around $260 billion, productivity over time because of the green revolution. largely through China’s official reserve holdings and 12. The poverty impact is generated by the World holdings of Chinese commercial banks. However, Bank’s Development Economics Prospects Group’s almost all of these instruments enjoy the backing of global income distribution dynamics poverty tool, and U.S. government-sponsored enterprises Fannie Mae was performed only for Sub-Saharan Africa because of and Freddie Mac, and the risks associated with these its high projected level of poverty in 2015. The global holdings appear to be minimal. income distribution dynamics tool probably underesti- 4. Developing countries of the Middle East and mates the true poverty impact, because information on North Africa region, which account for regional consumption in most surveys is insufficient to factor in 48 P R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S price changes fully. To the extent that the poor spend and manufacturing.” Policy Research Working a larger share of their meager budget on food, one Paper Series 2171. World Bank, Washington, DC. would anticipate an even greater negative impact for World Bank. 2007a. Global Development Finance the poor. 2007. Washington, DC: World Bank. _____. 2007b. Global Monitoring Report 2007. Wash- ington, DC: World Bank. References _____. 2007c. World Development Report 2008: Martin, Will, and Devashish Mitra. 1999. “Produc- Agriculture for Development. Washington, DC: tivity Growth and Convergence in Agriculture World Bank. 49 2 Technology and Technological Diffusion in Developing Countries Technological progress—improvements in the on the international connections and net- techniques (including firm organization) by works that expose firms and individuals in which goods and services are produced, mar- developing countries to cutting-edge tech- keted, and brought to market—is at the heart nologies and on the domestic factors that de- of human progress and development. At the termine how successfully countries are able to national level, technological progress can absorb and apply those technologies. To es- occur through invention and innovation; tablish a baseline for future work, both chap- through the adoption and adaptation of pre- ters adopt a positive (empirical) rather than a existing but new-to-the-market technologies; normative or prescriptive approach. Never- and through the spread of technologies across theless, some clear conclusions with policy firms, individuals, and the public sector implications do emerge from the analysis. within a country. This chapter begins its empirical examina- For developing countries, the bulk of tech- tion by reviewing existing estimates of the nological progress occurs through the latter contribution of technological progress to eco- two channels. Much of this chapter is con- nomic growth as measured by gross domestic cerned with measuring the extent to which product (GDP) and of income levels in devel- this process has occurred in countries in dif- oping countries. It reviews the mechanisms by ferent regions and at different income levels. which technology contributes to GDP and in- Although the current state of technological comes, but also stresses the contributions of achievement is itself illuminating, the pace at technology to other important development which it is changing is equally important, and goals that are not well captured by GDP this is estimated by comparing the level of alone, such as health, education, and the envi- technological achievement in the early 1990s ronment. In addition, it discusses some of the with its current level and inferring the pace of principal limitations of this kind of empirical change for different countries. The chapter analysis and accompanying caveats. The chap- concludes by looking at the speed with which ter then discusses a wide range of previously specific technologies spread both across coun- published indicators of the extent to which tries and within them. Armed with this broad various technologies have penetrated the view of technological progress within devel- economies of developing countries. For ease of oping countries, chapter 3 explores in more exposition, these indicators are arranged in detail the main factors that influence techno- three groups: those showing the extent of sci- logical progress in individual developing entific innovation and invention; those mea- countries. That chapter places equal emphasis suring the penetration of older technologies, 51 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 such as railroads and telephones; and those countries’ history, geography, and past measuring the penetration of newer technolo- government success in delivering gies, such as personal computers and mobile infrastructural technologies are equally phones. The chapter then develops an aggre- important determinants of the extent to gate measure of technological achievement which older technologies are used. using a statistical technique (principal compo- • Penetration rates of more recent tech- nents analysis) that combines some 20 sepa- nologies vary more regularly with in- rate indicators of technological achievement come. In part this reflects their relatively along these three dimensions, plus an lower start-up and infrastructure costs additional dimension, the extent to which than those of older technologies and countries are exposed to external technologies their more flexible delivery structure. (explored in more detail in chapter 3). The 2. While technological achievement tends to distribution of overall technological achieve- rise with income, it tends to level off. The level ment across countries and changes over the of technological achievement at which this lev- past decade are examined to evaluate both the eling off occurs differs across countries accord- speed with which technological achievement ing to their geography, history, and level of in countries is advancing and the dimensions technological absorptive capacity (discussed in along which change is occurring most quickly. more detail in chapter 3). Thus, reflecting an The chapter concludes by examining a new emphasis on equal access to education and longitudinal data set (Comin and Hobijn state-provided technological services, countries 2004) that tracks both the speed with which within the Europe and Central Asia region individual technologies are transmitted across have significantly higher levels of technological countries and the pace with which they diffuse achievement than other countries at similar in- within countries. come levels. By the same token, countries in Eight main results emerge from this Latin America and the Caribbean are some- chapter: what less advanced than might be expected, as earlier inward-looking policies and weak basic 1. While technological achievement is re- technological literacy in the overall population lated to income levels across countries, the have limited the extent to which technologies nature of this relationship differs depend- have permeated economic activity. ing upon the dimension of technology being 3. Technological achievement within coun- examined. tries can vary widely. Despite a level of tech- • While a strong correlation exists be- nological achievement in major cities that can tween scientific innovation and inven- rival that in high-income countries, low levels tion and income in high-income coun- of technological advancement in rural areas tries, almost none of this kind of activity mean that, viewed as a whole, countries such is being performed in developing coun- as China and India are not particularly tech- tries. As a result, virtually all technolog- nologically advanced. Moreover, because tech- ical progress in developing countries nology spreads slowly across firms, there are comes from the adoption and adapta- wide differences in the technological sophisti- tion of preexisting technologies. cation of production, even within the same • At an aggregate level, the use of older sector in the same country. technologies is positively related to in- 4. Overall, the technology gap between come in developing countries. However, middle-income and high-income countries has the extent to which they are employed narrowed over the past 10 years. Evidence of varies substantially within income catch-up is particularly strong in Chile, groups, suggesting that developing Hungary, and Poland, where the overall level of 52 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S technological achievement increased by more The role of technology than 125 percent during the 1990s. 5. On average, technology is advancing more in development rapidly among low-income countries. Among those low-income countries for which sufficient T echnological progress is at the heart of human progress and development. As the 1998 World Development Report on the data are available, the penetration of technol- knowledge economy (World Bank 1998) em- ogy is progressing more rapidly than in either phasized, the understanding of how things are middle- or high-income countries. However, created and the communication of that know- this reflects very strong catch-up in some coun- ledge are critical drivers of economic progress. tries and more modest improvements, or even Central to understanding the role of technol- relative declines, in the majority. Moreover, ogy is the recognition that technology and technology in high-income countries is also ad- technological progress are relevant to a wide vancing, and the absolute increase in these range of economic activities, not just manufac- countries is larger than in developing countries. turing and computers. For example, some esti- 6. The pace at which technology spreads mates suggest that technological progress has between countries is accelerating. Whereas a boosted productivity in agriculture four times new technology in the 1800s could take as as quickly as in manufacturing (Martin and long as 100 years to reach 80 percent of the Mitra 2001). Indeed, seemingly low-tech prod- world’s countries, for a new technology to ucts such as corn or flowers can be the result reach 80 percent of the world’s countries now of relatively high-tech production processes, takes less than 20 years. while in some countries the production of 7. Ultimately, however, what matters most ostensibly high-tech products such as comput- for technological achievement is the speed ers is an outcome of relatively low-tech assem- with which technology spreads within a coun- bly activities. Finally, in many cases technology try. Here too the evidence suggests a pickup in is embodied in production and management the pace of internal diffusion, but there is also systems rather than in physical goods or soft- widespread divergence across countries, even ware algorithms. A computer loaded with the across those at similar income levels. latest software that sits unused on a desk for 8. Changes in the regulatory environment most of the day is a very different manifesta- and in the nature of technologies partly ex- tion of technology than the same computer plain the acceleration in the rate at which they that is running a production process or man- penetrate into developing countries. Many old aging an accounts payable system. infrastructure technologies, such as roads, This report defines technology and techno- railroads, sanitation, and fixed-line telephone logical progress in this wider sense, although systems, are often provided by the government data limitations may give some of the measures and are thus subject to public sector budget developed the flavor of a more narrow, physi- constraints and the risk of government failure. cal, and manufacturing-oriented definition. By contrast, the most common new technolo- gies, such as the Internet, mobile phones, and computers, are being delivered in a regulatory Technology is both a critical determinant environment that encourages competition and and an outcome of rising incomes that harnesses private capital (domestic and Traditionally, economists view the process by foreign) to provide basic infrastructure. More- which goods and services are produced as one over, the past 10 years have been more stable that combines capital, labor, and other factors politically than the 1980s and 1990s, which of production (land and natural resources) has likely given a boost to the diffusion of using a particular technology. The relative ef- newer technologies. ficiency with which a given economy produces 53 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table 2.1 Disparity among TFP levels or remained stagnant in three of six develop- remains wide ing regions, with TFP growing faster in high- TFP relative to that Annual TFP income countries than in Latin America and of the United States, growth, 2005 1990–2005 the Caribbean, the Middle East, and Sub- Saharan Africa. (annual The relationships between income growth, (index, percentage Regions U.S. ϭ 100) change) technological progress, capital accumulation, East Asia and the Pacific 8.4 5.1 and welfare are, of course, much more complex Europe and Central Asia 21.7 2.2 than can be summarized in a simple measure Latin America and the Caribbean 19.3 0.2 Middle East and North Africa 13.3 0.5 of TFP, partly because each factor of produc- South Asia 5.8 2.3 tion and the technology with which factors Sub-Saharan Africa 5.6 0.2 are combined are dependent on one another. Income groups As discussed in chapter 3, capital goods often High-income OECD countries 77.1 1.3 embody significant technological progress and High-income non-OECD there is no simple way to distinguish between countries 53.1 0.7 the contribution that each makes to growth. Upper-middle-income countries 23.7 1.2 Similarly, technology in the form of knowl- Lower-middle-income countries 9.6 3.2 edge of business processes and of science and Low-income countries 5.2 1.7 general experience is embodied in labor. Source: Poncet 2006. Moreover, the contribution of technology to Note: OECD ϭ Organisation for Economic Co-operation and Development; TFP ϭ total factor productivity. welfare is only imperfectly measured by its im- pact on GDP (box 2.1). Technological progress can lower costs, goods and services given a certain quantity of improve quality, create new products, labor and capital is called total factor produc- and help reach new markets tivity (TFP). TFP is commonly interpreted as a Even though measures of TFP and its progress measure of the technology of production and give us a sense of the relative dispersion of its rate of growth as a measure of technical technological progress, they tell us little about progress.1 the mechanisms by which technology influ- International comparisons of TFP suggest ences development. Technological progress in- that enormous gaps exist between high- volves much more than doing the same things income and low- and middle-income countries better or with fewer resources. It is more dy- in the efficiency with which they produce namic, involving both the creation of new and goods and services (table 2.1). In 2005, the av- new-to-the-market products and production erage level of TFP in low-income countries techniques, but also the spread of these tech- was only slightly more than 5 percent of niques across firms and throughout the eco- U.S. levels. The technology lower-middle- nomy. While the mechanisms by which tech- income countries employed was roughly twice nological progress contributes to development as efficient and that of upper-middle-income are in some sense obvious, the following de- countries was approximately four times as effi- serve special mention: cient. While these gaps have been narrowing for low-income and lower-middle-income • Technological progress can spur countries, upper-middle-income countries development by lowering the costs of have only managed to maintain their relative production and enabling the exploitation position in relation to high-income countries. of increasing returns to scale. By improv- At the regional level, these gaps have widened ing the efficiency with which existing 54 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Box 2.1 Technology can contribute to welfare without affecting measures of short-term output W hile the relative level of TFP provides a sense of the efficiency with which factors are com- bined, it ignores the welfare contributions of techno- income, but may have important implications for the quality of life. In developing countries, the diffusion of such logy that do not have an immediate impact on GDP. technology as water and sanitation systems, oral re- For instance, in national accounts, the purchase of hydration techniques to treat diarrhea, immuniza- machinery that reduces air and water pollution, such tion, malaria prevention, and contraceptives have as scrubbers for smokestacks, may not increase been tremendously important for improving house- GDP. While the purchase of machinery will be hold well-being, but such innovations will affect recorded as income accruing to the producing firm, output only over time as improved child health even- this may be offset by reduced profits and other fac- tually pays off in terms of greater adult productivity tor payments of the purchasing firm. Thus, even (Alderman, Hoddinott, and Kinsey 2006; Behrman though over the longer term the machinery may con- and Rosenzweig 2004; Glewwe, Jacoby, and King tribute to a reduction in days of work lost because of 2001). These technologies may also have important respiratory illnesses, and therefore to an increase in noneconomic societal benefits, such as improved gen- national income, over the medium term the machin- der equality, which are not recorded in GDP because ery would have little measurable effect on GDP or women are more likely to engage in nonmarket pro- TFP despite the improvement in air quality, which duction, or may appear only with a lag as improved would provide a general, if not monetized, benefit. health technologies facilitate women’s entry into the Similarly, technological advances that reduce the cost labor force over time (Bailey 2006; Miller 2005; of public services may have little impact on recorded Schultz 2007). products are produced, new technologies for example, telecommunications or can open up the possibility of increasing reliable electrical service. output and, assuming that markets are • Technology can yield quality improve- available, taking advantage of previously ments. Such improvements can enable a unexploited increasing returns to scale. developing country to penetrate more • Technological progress in one sector can demanding consumer and intermediate create new economic opportunities in markets. This can be as simple as em- other sectors. Lower production costs ploying machinery and equipment that can create whole new products, or even produce goods and services that corre- sectors. A new-to-the-market innova- spond to the more exacting expectations tion in one sector can result in a flower- and standards of consumers and busi- ing of activity in other sectors by ness clients in high-income countries. creating a demand for and supply of Technology in this sense extends beyond goods and services that did not exist engineering technology to include man- previously (box 2.2). agement techniques. For example, one of • The benefits of a new technology can the big challenges facing Ugandan fish- extend well beyond the immediate eries was creating systems of quality as- sector or good in which the technology surance that allowed them to meet phy- exists. This is the case if the initial tosanitary standards in the European product is an important intermediate Union on a sustained basis (Chandra and good in the production of other goods, Kolavalli 2006). 55 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Box 2.2 Technological innovation may spur further innovation in upstream and downstream activities I n Chile, the creation of a viable international salmon farming industry involved the simultaneous development of a number of related new-to-the- technology involved learning how to use chemicals and mastering the logistical challenge of delivering this fragile product to the local airport on time and market products, including the domestic production with sufficient regularity to meet customers’ just-in- of fish tanks, fish eggs, salmon food, and vaccines, time requirements. and eventually the introduction of additional vari- Success in one activity may well lead to further eties of farmed fish. New process technology was innovation and technological deepening. The move also introduced, including systems for feeding, pro- from producing carnations to more fragile and ex- cessing, and stocking fish that met global quality pensive roses is an example. Another example is the and phytosanitary standards. shift to higher-quality products such as chilled rather The introduction of a cut flower industry in than frozen fish fillets. Yet another example of deep- Kenya to serve the European market represents the ening is palm oil production in Indonesia, where new indirect effect of the successful introduction of the processes include the production of new varieties of industry in Colombia to serve the U.S. market. The palms; the introduction of new crude and processed new activity generated a wide range of additional palm oil refining technologies; and, notably, the in- new-to-the-market innovations in the form of troduction of oleo chemical technologies. greenhouses and postharvest care facilities to preserve the freshness of blossoms. Process Source: Chandra 2006. Even relatively simple technologies can pressures.2 Dissemination of the simple skills have far-reaching development impacts required to build rainwater collection systems Technological advances do not need to be ex- can greatly improve access to clean drinking traordinarily complex or reliant on the most water and reduce the incidence of diarrhea, a sophisticated technology to have important major cause of infant mortality. Insecticide- development impacts. In many low-income treated mosquito nets are a well-known, cost- countries, fairly commonplace technologies effective strategy for preventing the spread of are often in short supply because of weak ca- malaria, but the main challenge in many coun- pacities to implement them (box 2.3), and rel- tries remains developing and implementing a atively simple innovations can have profound mechanism for distributing them to those effects. The green revolution is a dramatic ex- most in need and ensuring that they are used. ample of the effectiveness that even modest technological advances can have in boosting Despite these advantages, technological incomes among the poor. In addition, greater change can also be disruptive access to the technologies required to store While technological progress generates sub- and process food can increase food security, stantial benefits, it can also be disruptive, be- particularly in communities without access to cause its benefits are not necessarily evenly reliable electricity or means of refrigeration. distributed. In particular, while the introduc- The use of sawmill waste (sawdust, planer tion of an advanced technology may mean shavings, and chipper dust) to produce car- new opportunities for the innovator and bonized briquettes for use in household reduced costs for consumers, it can result in cooking can increase access by the poor to fuel significant short-term losses in incomes for for cooking while reducing deforestation competitors using older technologies. For 56 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Box 2.3 Promoting appropriate technologies in Rwanda techniques, such as passion fruit pasteurization and A recent study of Rwanda identified simple tech- nologies whose greater use could have a substan- tial impact on development. For example, the study pulping, that could reduce the share of crops lost to spoilage, which sometimes results in the loss of as identified a lack of qualified plumbers and water much as 30 percent of a crop. Public sector dissemi- sanitation technicians as a major factor holding back nation of best practices is hindered by poor skills and the implementation of simple rainwater collection inappropriate incentives, which result in research strategies that have helped improve the quality of centers producing local products that take insuffi- drinking water supplies in neighboring countries. cient account of users' needs and requirements. The Similarly, a lack of basic skills, including those neces- table provides a snapshot of the status of efforts to sary to manufacture stainless steel products, prevents promote the diffusion of simple technologies in the implementation of simple food processing Rwanda. Diffusion of selected “appropriate” technologies in Rwanda Rural energy • Biogas for institutions: installations ongoing and spreading • Biogas for households: pilot program of 163 units to start 2007 • Micro hydropower: 6 projects in preparation, more in future? • Biofuel: no national program or policy as yet • Wind: no program or policy as yet • Peat: large stocks but limited exploitation • Efficient stoves for urban areas: national program ongoing • Efficient stoves for rural areas: some programs ongoing • Rice and coffee husks for briquette production: limited programs • PV systems: technology available but slow market • Solar water heating: technology available but slow market Water and sanitation • Roof water harvesting: only on limited scale for households • Boreholes: few and expensive • Hand pumps: imported from region or India • VIP and Ecosan latrines technology: available, limited uptake Agricultural technologies • Irrigation through treadle and motorized pumps: limited uptake and transport • Drip irrigation: starting • Animal traction for tillage and transport: promoted in certain areas • Small tractors for rice puddling and transport: few units imported • Rice threshing and winnowing: few machines available and locally produced • Rice hulling: opportunities for small-scale processing • Maize milling: machines imported and locally made • Oil presses for sunflower, soya, essential oils: starting • Livestock spraying: locally made machine now available Low-cost building • Rice and coffee husks and peat for brick burning: some use • Hand brick press machines: locally made and imported • Engine brick press machines: imported Source: Watkins and Verma 2007. 57 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 example, improved production and processing require relatively high-level skills, greater par- of sugarcane in Brazil has allowed production, ticipation in international trade has led to in- incomes, and employment in that country to creasing demand for skilled workers, and thus increase significantly, but it has done so at the to greater income inequality in some countries expense of sugar producers in other countries, (Arbache, Dickerson, and Green 2004; Zhu who have been unable to compete. While the and Trefler 2005). At the same time, technical associated income losses may be painful, progress can be strongly pro-poor, for exam- the global impact tends to be positive, because ple, the discovery of simple technologies to the income losses promote the reallocation of store and process food in areas with insuffi- resources and activity to more effective uses. cient access to electricity or to enable low-cost Technological progress may also benefit approaches to combating disease. certain classes of workers over others. Tech- The disruptive nature of technological nological change that uses high-level skills progress can generate important benefits to more intensively may hurt less skilled workers society by spurring competition. For example, in high-income countries by increasing the de- the introduction of mobile phone technology mand for skilled workers and simplifying in several developing countries has introduced tasks or allowing the outsourcing of tasks that an important element of competition not only previously were accomplished by relatively in the telecommunications sector, but also in well-paid semiskilled workers. Many econo- banking and other information-sensitive sec- mists cite the recent tendency for technologi- tors. Partly as a result, many of the informa- cal progress to benefit more skilled workers as tional asymmetries generated by a lack of effec- a major source of the rise in earnings inequal- tive communications that various middlemen ity in most advanced countries.3 Note, how- used to exploit have been eliminated, raising ever, that technical change does not always producer prices and lowering consumer raise the demand for skilled workers relative prices.5 These benefits are often accompanied to unskilled workers, nor does the disruption by shifts in the distribution of income whereby necessarily occur to the detriment of low-skill some groups can lose either relative to others workers. Thus the weaving and spinning ma- or in absolute terms. These losses can be diffi- chines that benefited lower-skilled workers by cult for the poor to absorb, underlining the enabling them to produce textiles formerly importance of safety nets to minimize social produced by skilled artisans were destroyed in conflict and to ensure that overall progress the Luddite and Captain Swing riots of the does not come at too high a cost for some 19th century (Acemoglu 2002). individuals. Moreover, if changes in earnings in developing countries are taken into account, it is no longer clear that technical change has Measuring technology been biased toward skilled workers. By some in developing countries measures, global inequality has not increased over the past two decades.4 Global income distribution has benefited from the rapid T he remainder of this chapter is concerned with measuring the level of technological achievement in developing countries and re- growth in China and India, which has enabled cent progress in this regard. This first section hundreds of millions of people to escape goes beyond indirect measures of technology poverty. Technical change interacting with in- like TFP, and seeks a more direct measure of creased globalization may have increased in- technological achievement by exploring the ex- equality within some countries by increasing tent to which specific technologies have per- the demand for skilled workers. By opening meated economic activity in developing coun- up opportunities for technical progress tries and the intensity of scientific innovation through the production of export goods that and invention. 58 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Measuring technology directly is difficult, in technology indexes. Summary indexes are mainly because, unlike pencils or automobiles, derived from these along three dimensions of technology has no easily counted physical technological achievement: the extent of scien- presence. Nor does it have a well-defined tific innovation and invention, the diffusion of price that would allow it to be measured and older technologies, and the diffusion of newer aggregated in the same way that services are. technologies. We begin by reviewing current Rather, technology is embodied in products, levels of technology and their dispersion and intermediate inputs, and processes. As a recent trends in a number of indicators that the result, most efforts to measure it have been literature pertaining to these three dimensions forced to use indirect techniques (see of achievement has used. Archibugi and Coco 2005 for a review). Some In a subsequent section, summary indica- indexes emphasize inputs into technological tors of achievement along each of these di- advancement, such as education levels, num- mensions are derived using principal compo- bers of scientists and engineers, and expendi- nents analysis. Their current levels and recent tures on research and development (R&D) or trends are discussed, an overall index of tech- R&D personnel, for example, the index of nological achievement is generated from these innovation capability put out by the United summary indicators, and a fourth indicator Nations Conference on Trade and Develop- (developed in chapter 3) summarizes the ex- ment (UNCTAD 2005). Other indexes also tent to which external technology is used in incorporate information on the diffusion of the production process. technologies and on indicators of innovation, such as the number of patents granted. The Scientific innovation and invention technology achievement index, published by Most technological improvements in develop- the United Nations Development Programme ing countries are at least partially dependent is an example. Still other indexes focus on out- on the diffusion of technology from more puts, such as the share of high-tech activities advanced countries. Nevertheless, scientific in manufacturing value added and exports, for innovation is important in some developing instance, the index of competitive industrial countries, and advanced technologies often performance published by the United Nations need to be adapted to local conditions, which Industrial Development Organization (UNIDO may require further innovation. 2002). Some indexes focus more on the mech- anisms by which technological progress is The intensity of innovation is closely achieved (Sagasti 2003) or by which techno- related to per capita income . . . logical learning occurs (Soubattina 2006). For The degree of scientific innovation in develop- example, the national innovative capacity ing countries, as measured by the number of index reflects government and firm-level journal articles and patents granted (scaled by policies associated with successful innovation population), varies sharply with per capita in- (Porter and Stern 2003). come (table 2.2).6 Authors from high-income Each of these approaches has its strengths, countries report 7 times as many published ar- but none of them is entirely satisfactory, both ticles than those from upper-middle-income because the indicators used fail to do justice to countries and 88 times as many as authors from the broad definition of technology adopted low-income countries. Variations for measures here (box 2.4), and because the methods by of patents granted and license fees earned are which these indexes are constructed are some- even larger. This result is generally reflected in times arbitrary (Archibugi and Coco 2005). To regional data, with countries in regions with overcome these deficiencies, the indexes devel- higher incomes such as Latin America and the oped in the remainder of this chapter include a Caribbean reporting higher levels of patents number of indicators not previously included and journal articles than regions such as South 59 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Box 2.4 Shortcomings of available measures of technological achievement A vailable indicators provide only a partial view of the level of technological achievement in devel- oping countries and of the gap with high-income groups, and countries. For example, the relatively low performance of South Asia reflects the slowness of technology diffusion from the relatively advanced countries. Most available indicators reflect the quan- major cities to rural areas, as well as from the rich to tity of technology used, whereas the quality of deliv- the poor within urban areas. Indeed, the degree of ery is often what is critical. For example, the value of technological diversity across Chinese regions or electricity in production is a function of both the Indian states mirrors the extent of diversity across amount consumed and its reliability. In general, developing countries, with regions containing large global indicators of technology levels do not take technologically sophisticated cities, such as Mumbai differences in quality sufficiently into account. To the or Delhi, being well ahead of areas that lag behind in extent that quality of delivery varies systematically economic development. with income levels, the indicators likely understate Finally, most indicators tend to be biased toward the differences between rich and poor countries. For goods (as opposed to services), and among these, example, Kaufmann, Leautier, and Mastruzzi (2005) toward electronic and other high-tech goods. Most find that access to infrastructure services (similar to measures also focus on product technology (goods what we measure here) and the quality of infrastruc- and services that themselves are highly technical) ture services in urban areas are both closely related rather than final (or intermediate) goods and services to the strength of governance, which is itself highly that may be technologically unremarkable, but which correlated with income levels. are the result of a technologically sophisticated pro- Nor do the available indicators reflect the dispar- duction process, for example, maize that is produced ity of achievement within countries. National indica- using sophisticated crop rotation methods, enhanced tors of technological achievement are based on coun- irrigation and fertilization strategies based on satel- try averages, but large gaps exist in the extent to lite imaging, and bioengineered seeds. which technologies are used within regions, income Asia or Sub-Saharan Africa, which are domi- upper-middle-income countries in the early nated by lower-income countries. The ratio of 1990s following the integration of the patents granted to residents to the total number transition economies of the former Soviet of patents a country grants (an indicator of the Union into the world economy. The continu- extent to which innovations are generated ous increase in patent activity among lower- domestically) is only weakly correlated with middle-income countries mainly reflects activ- income. Equally important influences include ity in China, whose share in world patent the domestic economic structure, the country’s applications rose from about 1.5 percent in openness to foreign direct investment (FDI) (see the late 1980s to a peak of nearly 10 percent chapter 3), the domestic costs of making a patent in 2004. Excluding China, additional patent- application, local intellectual property rights, ing activity in lower-middle-income coun- and the legal environment—all factors that dic- tries has been relatively modest. While tate the potential benefits from holding a patent. patent activity has also risen in low-income Patent activity in middle-income countries countries, it remains far below that in has increased over the past 20 years middle-income countries both in the ab- (figure 2.1), primarily because of a sharp jump solute numbers of patents issued and relative in patenting (relative to population) among to the population. 60 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Table 2.2 Scientific and innovative outputs Scientific and Number of Royalty and technical journal USPTO EPO Total patents to license fee articles, patents, patents, patents, nonresidents receipts Regions and income groups 2003 2006 2005 2003 2003 2004 (percent of (percent of Regions (Number per million people) total) GDP) East Asia and the Pacific 17 0.7 0.01 37 77 0.02 Europe and Central Asia 90 0.9 0.40 95 28 0.06 Latin America and the Caribbean 35 0.7 0.21 46 98 0.03 Middle East and North Africa 18 0.1 0.03 — — 0.02 South Asia 9 0.5 0.07 1.4 60 0.00 Sub-Saharan Africa 5 1.4 1.16 157 100 0.06 Income groups World 111 38.6 11.4 127 41 0.27 High-income countries 584 135.1 42.6 331 38 0.33 Upper-middle-income countries 85 1.4 0.40 91 42 0.04 Lower-middle-income countries 21 0.6 0.01 46 64 0.03 Low-income countries 7 0.4 0.07 3.5 56 0.00 Source: World Development Indicators, USPTO, EPO, and World Intellectual Property Office data. Notes: EPO ϭ European Patent Office, USPTO ϭ U.S. Patent and Trademark Office. To reduce home bias, the total patents granted by the USPTO to high-income countries exclude those granted to the United States, and the total patents granted by the EPO exclude those granted to high-income European Union countries. — ϭ not available. . . . although the Europe and Central Asia Publication rates there are equal to those in region is an outlier many high-income countries, and patent ac- Reflecting a history of advanced scientific tivity is more than twice the level in any other and engineering work in a number of former developing region. The region is also the Soviet bloc countries, the Europe and Central most self-reliant of developing regions in Asia region has relatively high levels of scien- terms of patent activity, with only 28 percent tific innovation and invention (table 2.2). of patents being filed by nonresidents, a fig- ure that is even lower than the high-income country average of 38 percent. The East Asia and Pacific region also scores high in terms of Figure 2.1 Patent activity is rising in patents, although its publication record is middle-income countries more in keeping with that of other develop- Total patent applications per 10,000 people ing regions. In some countries, such as China 1.8 and India, conscious efforts to raise R&D Upper-middle- 1.6 income countries spending have led to higher levels of scientific 1.4 innovation than might be expected based on 1.2 income (Lederman and Saenz 2005), while 1.0 Lower-middle- low levels of innovation in Latin America 0.8 income countries (LMY) and the Caribbean reflect an academic re- 0.6 search tradition with few links to industry Low-income LMY excl. China 0.4 countries (Maloney 2006). 0.2 0 Penetration of older technologies 91 01 93 99 89 85 95 03 97 87 The clear dominance of high-income countries 19 20 19 19 19 19 19 20 19 19 Source: World Development Indicators. in the number of scientific and technical jour- nal articles published, the number of patents 61 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Box 2.5 Deepwater petroleum technology in Brazil E xperience in the extractive sectors can help gener- ate new technologies that in turn can be used as a source of global comparative advantage. The expe- Petrobras’s many patents and continues to help de- velop cutting-edge technology for the company. Petrobras is now recognized as a world leader in all rience of Brazil’s Petrobras, a majority state-owned phases of deepwater technology—from drilling; to company, in exploiting that country’s considerable underwater completion, pumping, and production deepwater oil and natural gas resources provides an using floating structures; to mooring and processing— interesting example. with its particular expertise is in the areas of un- To exploit the Campos Basin, which lies in the manned subsea installations, marine engineering, and Atlantic at a depth of more than 100 meters and floating production systems. About two-thirds of its now accounts for nearly 84 percent of Brazil’s oil production is at a depth of more than 300 meters, and production, Petrobras created the anticipated pro- at various times Petrobras has set a number of duction system on a floating platform. This ad- records, including oil production at a water depth of vanced system, developed with the help of foreign 1,853 meters and the then-deepest exploration well experts, cut the delay between discovery and early (2,853 meters) in the giant Roncador field. production of deepwater fields from as long as six Petrobras has used its advanced technology to years to a mere four months and has since become a perform exploration and production work in model for the industry worldwide. Angola, Argentina, Bolivia, Colombia, Nigeria, Petrobras has successfully leveraged this experi- Trinidad and Tobago, and the United States and has ence, developing many patents both on its own and acquired offshore exploration blocks and interests in in conjunction with the rest of the industry, universi- Equatorial Guinea, Libya, Senegal, and Turkey ties, and research institutes. It has invested heavily in (Black Sea). It has also recently signed various agree- research and education, creating its own R&D cen- ments in China, India, Mexico, Mozambique, and ter, to which it allocates 1 percent of its gross in- Tanzania. come. The center, whose staff is increasingly made up of Brazilian experts, has contributed significantly to Source: World Bank. granted, and the extent of licensing and efficient extraction of natural resources often royalty fees realized points to the relatively requires advanced technology and can encour- minor role that at-the-frontier innovation age technological progress. Indeed, the failure plays in determining technological progress in to absorb new technologies is an important developing countries and the relative impor- reason for the slow growth of many natural tance that adoption and adaptation of existing resource-based economies in Latin America technologies must play. We look first at the (box 2.5). diffusion of older technologies. The major technological innovations of the Affordability limits the penetration of past two centuries—such as steam power, elec- electrical networks in some countries . . . tricity, the internal combustion engine, the Affordability, exacerbated by fiscally con- telephone, radio, and television—exist to strained governments, helps explain the some degree in virtually every country in the modest diffusion of many technologies critical world. However, the extent to which they are to development. This appears to be the case available within countries varies enormously, for a number of infrastructure technologies depending both on the technical adaptive such as electricity (figure 2.2), rail and road capacity of the country (chapter 3) and on the transportation, and fixed-line telephony. In affordability of the technology. each of these cases, a reliance on governments Many of the most prominent technologies to provide these services, coupled with weak are in the manufacturing sector. However, the institutions and a lack of domestic capacity to 62 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S having no or only limited service. In India Figure 2.2 Electrical consumption varies for example, only 85 percent of rural villages markedly even at similar income have access to the power grid. In Sub-Saharan levels (2004) Africa, only 8 percent of the rural population Per capita electric power consumption (kilowatt hour per capita) has access to electricity, compared with 51 per- 7,000 cent of the urban population. In South Asia, only 30 percent of the rural population has ac- 6,000 cess to electricity, compared with 68 percent of 5,000 the urban population (Besant-Jones 2006). 4,000 Moreover, the reliability of the grids varies enormously, partly because of the amount of 3,000 electricity lost through pilferage or in trans- 2,000 mission. Because of electricity’s importance as 1,000 an intermediate input, the reliability of the electrical supply may be even more important 0 0 5,000 10,000 15,000 20,000 to the diffusion of other technologies than its GDP per capita PPP (current $) availability. Many machines are sensitive to the quality of electrical power and many processes East Asia and the Pacific Europe and Central Asia are intolerant of interruptions. As a result, un- Latin America and Middle East and the Caribbean North Africa reliable power can be an important factor in South Asia Sub-Saharan Africa preventing the implementation of these tech- Sources: World Bank; World Development Indicators. nologies in some countries. For the world as a whole, electricity losses amount to an average of 9 percent of the power produced. Countries in East Asia and the Pacific and Sub-Saharan maintain systems, has limited their diffusion Africa and members of the Organisation for in a number of low- and middle-income Economic Co-operation and Development countries. (OECD) do better than this average, while Other factors, such as industrial structure, losses in South Asia approach 30 percent. climate, tax policies, and preferences, are also Furthermore, the impact of power reliability at play. In the case of electricity, the way a differs across countries. In Bangladesh, for country organizes its power sector (the process example, where transmission and distribution technology employed) can also have a strong losses represent only 9 percent of produced bearing on the diffusion of the specific tech- power, some 70 percent of managers indicate nology within the economy. For example, that unreliable power is a serious constraint to many countries in the former Soviet bloc enjoy business. In contrast, in Cameroon and near-universal access to electrical power and Moldova, where transmission losses are much per capita consumption rates that are more greater than in Bangladesh, the share of man- than double those in any other developing agers making this complaint is much lower— region (table 2.3). This reflects a much earlier 13 percent in Cameroon and less than 4 per- decision to emphasize electrification and the cent in Moldova (World Bank 2007e). provision of subsidies under communist rule. Access to power in other regions is more . . . and restricts access to efficient spotty, with most of the population in most transportation . . . large cities having access (or at least the Like the electrical network, transportation possibility of access) to the electrical power systems are old technologies that enable grid, but with a large share of the rural popu- other technologies, and their dissemination lation, particularly in the poorest countries, within countries has been closely affected by 63 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table 2.3 Indicators of the diffusion of older technologies Electric power transmission Electric power consumption and distribution losses Telephone mainlines 2004 2004 2004 Regions (kilowatt-hours/capita) (percentage of output) (per 100 people) East Asia and the Pacific 1,343 7 19 Europe and Central Asia 3,637 12 26 Latin America and the Caribbean 1,674 17 18 Middle East and North Africa 1,289 16 13 South Asia 414 26 4 Sub-Saharan Africa 550 9 2 Imcome groups World 2,606 9 19 High-income countries 9,609 6 54 Upper-middle-income countries 3,454 12 23 Lower-middle-income countries 1,448 10 19 Low-income countries 375 23 3 Price basket for residential fixed telephone line Road density Rail density 2004 1999 2005 (kilometers of (kilometers of (percentage of gross national road/100 square kilometers rail/100 square kilometers Regions income/capital/month) of land area) of land area) East Asia and the Pacific — 14.2 0.42 Europe and Central Asia 3.5 11.8 0.81 Latin America and the Caribbean 3.2 16.1 0.31 Middle East and North Africa 4.4 6.8 0.27 South Asia 10.6 80.6 1.55 Sub-Saharan Africa 29.3 6.4 0.18 Income groups World 2.2 22.1 0.66 High-income countries 1.0 41.2 1.17 Upper-middle-income countries 3.9 11.9 0.70 Lower-middle-income countries 6.0 14.5 0.39 Low-income countries 20.7 19.0 0.36 Agricultural machinery and tractors Irrigated land Air transport 2003 2003 2004 (number of registered (per 100 square kilometers (as a percentage carrier departures/1,000 Regions of arable land) of cropland) people) East Asia and the Pacific 93 — 1.1 Europe and Central Asia 184 11 2.1 Latin America and the Caribbean 123 11 2.8 Middle East and North Africa 141 32 1.2 South Asia 143 39 0.3 Sub-Saharan Africa 13 4 0.5 Income groups World 202 18 3.7 High-income countries 433 12 18.0 Upper-middle-income countries 173 10 3.2 Lower-middle-income countries 113 24 1.3 Low-income countries 90 24 0.3 Sources: World Bank; World Development Indicators. Note: — ϭ not available. 64 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S government regulation and affordability. system tends to fall with population density, Many process technologies (for example, the which helps explain the particularly low den- assembly, sorting, refrigeration, and delivery of sity of railroads observed in Sub-Saharan fresh fruit) depend on an effective transporta- Africa (Stelling and Jensen 2001). Interestingly, tion network. The diffusion of railroads with the exception of Europe and Central among developing countries varies widely, Asia, per capita income does not appear to be with the countries of the former Soviet bloc an important factor in explaining the diffusion having a much more extensive rail transport of either rail or road networks. Moreover, the system than other developing countries at sim- observed distribution of road networks is only ilar income levels. This variance is explained weakly correlated with population density. in part by differences in population density Relative to other regions, Latin America and (figure 2.3). The cost per passenger mile of a rail the Caribbean has significantly more roads Figure 2.3 Rail and road densities rise with income and population density (2004) Rail density By income per capita - 2004 By population density - 2004 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 0 5,000 10,000 15,000 20,000 0 100 200 300 400 GDP per capita PPP (current $) People per square kilometer Road density 400 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 0 5,000 10,000 15,000 20,000 0 200 400 600 800 1,000 GDP per capita PPP (current $) People per square kilometer East Asia and the Pacific Europe and Central Asia Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Sources: World Bank; World Development Indicators. 65 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 than would be expected on the basis of popu- particularly important enabling technology lation and income, while the high average for landlocked economies with poor access to road density in South Asia mainly reflects high ports in neighboring countries. Air transport densities in Bangladesh and India and low is a newer technology, and its distribution densities elsewhere in the region. across countries tends to follow income at the Considerable disparities in access to road most aggregated level. Thus high-income and rail transport services are found within countries registered 18 carrier departures per many developing countries. Rural areas in par- 1,000 people in 2004, compared with 0.3 de- ticular suffer from poor access to transport ser- partures for low-income countries. Although vices. During 1994–2001, only an estimated middle-income countries have a higher num- 61 percent of the rural population in low- ber of carrier departures relative to population income countries lived within two kilometers than do low-income countries, the cross- of an all-season road (Briceno-Garmendia, Es- country correlation between income and air tache, and Shafik 2004). Poor access to trans- transport intensity is relatively low for all de- port facilities can cause the neglect of poten- veloping countries (figure 2.4). This suggests tially productive land, limit yields of used that factors such as the importance of tourism lands to levels below their potential, and re- to the economy and access to alternative forms duce profits from the sale of produce, all of of transport—especially relevant for island which weakens incentives for farmers to max- nations—are among the most important deter- imize production, thereby limiting the minants of the intensity of air transport use. prospects for alleviating poverty (World Bank The delivery of fixed-line telephone services 2006). Improving road access can thus have a follows a similar pattern. On average, the in- dramatic impact on growth in remote areas. cidence of this mature technology among upper-middle-income countries is less than . . . and air transport and telephones half that in high-income countries, and in low- A well-developed air transport network is also income countries falls to almost 5 percent of essential for some technologies and may be a developed country levels. Across regions, the Figure 2.4 Telephone densities are highly correlated with income, but air transport is not Registered air carrier departures Fixed-line and mobile phone subscribers (per 1,000 people), 2005 (per 1,000 people), 2004 60 1,600 1,400 50 1,200 40 1,000 30 800 600 20 400 10 200 0 0 0 5,000 10,000 15,000 20,000 25,000 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 GDP per capita PPP (current $) GDP per capita PPP (current $) East Asia and the Pacific Europe and Central Asia Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Sources: World Bank; World Development Indicators. 66 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Table 2.4 Affordability of fixed-line phones falls rapidly with lower incomes (cost of fixed-line phone service as a percentage of monthly income in dollars and PPP) Per capita income Price as a % of monthly income Monthly price GNI PPP fixed-line phone GNI PPP Regions East Asia and the Pacific 1,630 5,194 5.9 4.3 1.4 Europe and Central Asia 4,143 9,152 9.5 2.8 1.2 Latin America and the Caribbean 4,045 8,116 10.0 3.0 1.5 Middle East and North Africa 2,198 6,084 7.3 4.0 1.4 South Asia 692 3,142 5.1 8.8 1.9 Sub-Saharan Africa 746 2,004 14.0 22.5 8.4 Income groups World 7,011 9,424 11.7 2.0 1.5 High-income countries 35,264 32,550 27.6 0.9 1.0 Sources: World Bank; World Development Indicators. Note: GNI ϭ gross national income; PPP ϭ purchasing power parity. incidence is once again much higher in Europe in seeds; more capital intensive forms of and Central Asia, reflecting the heritage of the embodied technology such as tractors, fertil- communist era. Elsewhere, East Asia and Latin izer, and irrigation systems; and better process America have fewer than 20 phone lines per technology, such as crop rotation and man- 100 people and South Asia and Sub-Saharan agement techniques for disease-resistant crops Africa have fewer than 5 lines per 100 people. (box 2.6). In contrast to air transport, the cross- At the same time, the diffusion of medical country correlation between the availability technologies within low-income countries has of telephones and income levels is strong been slow. Some of the most important tech- (figure 2.4). The cost of residential service is sig- nological developments of the past 100 years nificantly higher in the low-income regions of have been medical, including the discovery South Asia and especially Sub-Saharan Africa and widespread distribution of antibiotics and (8.4 percent) than in the predominantly the eradication and effective treatment of a middle-income regions (table 2.4). wide range of previously deadly or debilitating viruses, including retroviruses such as those that cause HIV/AIDS. The adoption and adaptation of old The diffusion of knowledge about treat- technologies varies by sector ments is generally relatively speedy and effi- The diffusion of old technologies has con- cient within the medical community, but their tributed to rapid growth in the agriculture sec- diffusion and application within the popula- tor in many developing countries. During tion of the developing world is much slower. In 1967–92, TFP (often used as a proxy for Europe and Central Asia, Latin America and increases in technology) is estimated to have the Caribbean, and the Middle East and North increased four times as quickly in agriculture Africa, the average share of children immu- as in the manufacturing sector in both nized for measles, diphtheria, pertussis high-income and developing countries (Martin (whooping cough), and tetanus is 89 percent or and Mitra 2001). In part this growth better, bringing them close to the immuniza- represents the exit of underemployed farm tion rates in high-income countries. East Asia workers to better paying jobs in other sectors, and the Pacific also posts immunization rates but it also represents significant improvements above 80 percent. However, immunization 67 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Box 2.6 The green revolution T he green revolution is an example of the dramatic effects that modest technological advances can have in boosting the incomes of the poor. The green by the late 1990s it was clear that poor people had reaped substantial benefits from higher incomes, less expensive food, and increased demand for their labor. revolution was a decades-long effort, guided primar- The public sector was critical to this effort, because ily by public sector and nonprofit institutions, to the development of new seed technologies has some create and disseminate agricultural technologies to aspects of a public good: developers cannot capture developing countries. The principal technologies the full benefits, because once the seed is widely involved were pesticides, irrigation, and synthetic available, it can be easily reproduced. The green revo- nitrogen fertilizer, which had long been available in lution also demonstrates some of unintended effects industrial countries, along with the development of that can accompany the adoption of new technolo- high-yielding varieties of maize, wheat, and rice. gies: the excessive use of agrochemicals has polluted Asia’s green revolution doubled cereal production be- waterways, wasteful irrigation has contributed to tween 1970 and 1995 while increasing the land area water scarcity, and high livestock concentrations near devoted to cereals by only 4 percent (World Bank urban areas have contributed to the spread of disease. 2007b). Even though the impact of the green revolu- tion on the poor was initially a source of controversy, Source: World Bank 1998, 2007b. rates in South Asia and Sub-Saharan Africa munized. The disappointing failure to de- average 59 to 63 percent (table 2.5). In part, liver this basic technological service arises this reflects particularly low immunization despite the intense involvement of the interna- rates in some of the larger countries in these re- tional community in assisting, and in some gions, notably India (less than 60 percent) and instances taking full responsibility for, this Nigeria (less than 35 percent), which outweigh process. Moreover, the pace at which these the better performance of some of the smaller rates are rising is disappointingly low as coun- countries, for example, in Sri Lanka, 99 percent tries continue to struggle to implement of children aged 12 to 23 months are im- effective delivery systems. Partly as a result, Table 2.5 Immunization rates lag significantly in South Asia and Sub-Saharan Africa (children aged 12–23 months immunized) DPT Measles DPT Measles 1993 2003 1993 2003 2003 2003 (ratio to (ratio to (percent (percent high-income high-income Regions immunized) immunized) countries) countries) East Asia and the Pacific 83 83 79 83 0.87 0.90 Europe and Central Asia 80 89 84 91 0.94 0.99 Latin America and the Caribbean 78 90 82 93 0.95 1.01 Middle East and North Africa 85 91 84 92 0.96 1.00 South Asia 59 63 59 61 0.66 0.66 Sub-Saharan Africa 49 59 51 61 0.62 0.66 High-income countries 88 95 83 92 1.00 1.00 World 71 76 71 75 0.80 0.82 Sources: World Bank; World Development Indicators. Note: DPT ϭ diphtheria, pertussis, and tetanus. 68 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Table 2.6 Diffusion of both water and sanitation technology is low in rural areas Improved water sources Total population Rural population Urban population 1990 2004 1990 2004 1990 2004 Regions (percent of population with access) East Asia and the Pacific 71.8 78.5 61.4 69.8 97.3 91.9 Europe and Central Asia 91.7 91.7 83.4 79.8 97.0 98.7 Latin America and the Caribbean 82.8 91.0 60.0 73.0 92.6 96.0 Middle East and North Africa 87.5 89.5 78.9 80.8 96.1 96.3 South Asia 70.6 84.4 64.9 81.3 88.6 93.6 Sub-Saharan Africa 48.9 56.2 36.1 42.4 81.9 80.1 Income groups World 76.4 82.7 63.2 72.2 95.2 94.5 High-income countries 99.8 99.5 99.1 98.5 99.8 99.8 Upper-middle-income countries 88.1 92.7 73.5 77.8 94.8 97.7 Lower-middle-income countries 74.2 80.8 62.9 70.9 96.4 93.1 Low-income countries 64.3 75.0 56.7 69.4 87.0 88.1 Improved sanitation facilities Total population Rural population Urban population 1990 2004 1990 2004 1990 2004 Regions (percent of population with access) East Asia and the Pacific 29.7 50.6 15.3 36.1 65.5 72.4 Europe and Central Asia 86.1 85.0 72.0 70.3 93.7 93.0 Latin America and the Caribbean 67.4 77.1 35.4 48.7 80.7 85.7 Middle East and North Africa 69.9 76.2 52.0 57.9 87.1 92.3 South Asia 17.4 37.2 6.3 26.6 50.3 62.7 Sub-Saharan Africa 31.5 37.2 23.8 28.2 52.4 53.3 Income groups World 44.4 57.0 22.8 37.7 77.2 79.4 High-income countries 100.0 100.0 100.0 100.0 100.0 100.0 Upper-middle-income countries 76.7 81.4 52.6 59.9 87.1 88.6 Lower-middle-income countries 37.3 55.4 19.7 38.8 72.9 76.2 Low-income countries 21.3 38.3 11.6 28.5 49.6 60.5 Sources: World Bank; World Development Indicators. child mortality rates remain elevated in these improved drinking water (this share rises to regions. 65 percent if Nigeria, where only 35 percent The health benefits of clean drinking water of the population has access to improved and sanitation facilities have been understood water, is excluded). The rest of the developing for centuries. Nevertheless, one in five people world does much better on these measures. living in developing countries lack access to For example, close to 90 percent of the popu- improved water sources and only half have lation in Europe and Central Asia has access access to improved sanitation facilities to improved water (91.7 percent) and sanita- (table 2.6). In South Asia and Sub-Saharan tion sources (85 percent). Nevertheless, the Africa, only some 37 percent of the popula- diffusion of these basics technologies is weak tion has access to improved sanitation ser- in rural parts of all developing areas, reflecting vices, while only slightly more than half of the more intense affordability issues and the Sub-Saharan African population has access to relative scarcity of basic technological literacy 69 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 and the competencies necessary to install and America was concentrated in universities, was maintain such systems (see the discussion on oriented toward research at the global frontier basic technological literacy in chapter 3). For (but generally not of cutting-edge quality), and example, in China and India, only 44 and 33 had few links to firms (Maloney 2006). percent, respectively, of the rural population have access to improved sanitation. Penetration of recent technologies The relatively slow diffusion of many old Older technologies have become widely technologies in developing countries contrasts diffused in many countries, but large sharply with the relatively rapid penetration disparities remain of newer technologies (table 2.7). Macro- Older technologies have penetrated less com- economic turmoil, civil strife, and fiscal con- pletely into developing countries than into de- straints limited the within-country diffusion of veloped countries, but the gap is much less many older technologies, but more hospitable pronounced than the gap for indicators of sci- circumstances—including low inflation, low entific innovation and invention. Moreover, government deficits, and a technical and regu- the relationship between income levels and latory environment that has better harnessed the diffusion of older technologies within the private sector financing of new technologies— developing world is relatively weak, suggesting have contributed to the spread of more recent that the efficiency of the regulatory environ- technologies. In a few cases, newer technolo- ment and the diffusion of basic skills within gies have leapfrogged over older ones, for ex- countries are more important than incomes in ample, mobile phones now have higher pene- determining the actual level of diffusion of tration rates in some countries than fixed-line these technologies. Countries with the highest telephones. achievement in each income group find them- Distinguishing between old and recent selves at about the median level of achievement technologies is necessarily arbitrary. To a of the next highest income group. Once again, certain extent, road infrastructure is an an- the level of diffusion of the older technologies cient technology, and yet the technology em- tends to be higher for countries of the former bodied in producing a kilometer of German Soviet bloc than for other countries at the same autobahn is completely different from that re- income level, while both the upper-middle- quired to construct a kilometer of dirt track in income and lower-middle-income countries of Somalia. Similarly, exports that are currently Latin America and the Caribbean tend to re- classified as high-tech are in some cases evolu- port lower levels of diffusion than other coun- tionary developments from relatively old tech- tries at similar income levels. nology (mobile phones, for example, evolved The striking differences between Europe from radios and fixed-line telephones).7 and Central Asia on the one hand and Latin Nonetheless, the distinction is useful, because America and the Caribbean on the other hand in many cases the factors that have impeded in the diffusion of older technologies may re- the diffusion of old technologies within devel- flect differences in income distribution and in oping countries are qualitatively different the nature of R&D activities (box 2.7). Europe from those that impede the distribution of and Central Asia had more equal access to more recent technologies. For instance, the education combined with greater government diffusion of many of the older technologies investment in infrastructure, which facilitated depended upon the creation and maintenance more rapid diffusion of technologies than in of expensive government infrastructure at a Latin America and the Caribbean. In addition, time when many governments were grappling whereas R&D activity was clearly linked to with severe budget constraints and weak tech- the industrial strategy of Soviet-era firms in nical and governance capacity. Not only are Europe and Central Asia, R&D in Latin today’s technologies being exploited in a more 70 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Box 2.7 Technology and growth in Latin America’s natural resource-based economies W hile much of the value added from extractive industries, such as crude oil production and mining, is a return to land, the technology employed Second, innovation was discouraged and firm entry was inhibited by anticompetitive guilds, labor markets that were excessively protective of insiders’ in these activities is often very sophisticated. Some rights, concentrated credit markets that only lent to economies, such as Australia, Canada, and Sweden, insiders, explicit trade barriers that impeded knowl- achieved rapid rates of growth over the 20th century edge spillovers from trade interactions, and barriers through the efficient exploitation of natural re- to FDI. The concentration of wealth also discour- sources. By contrast, Latin America’s natural aged innovations by newcomers. Rights to organize resource-based economies achieved relatively limited corporations and financial institutions were rationed growth; until recently, substantial mineral deposits to protect the value of rights held by powerful inter- have gone unexploited. Two central reasons explain ests and the costs associated with filing patents were the failure to capitalize on Latin America’s natural exorbitant. After the Great Depression, attempts to resource opportunities. force rapid industrialization through import substitu- First, the region had low levels of human capital tion policies led to sectors that were out of line with and weak institutions that slowed the adoption and comparative advantage, that were walled off from creation of new technologies. Latin American countries competition and sources of innovation, and that re- invested much less than other regions in promoting ed- quired substantial subsidies to survive. Natural re- ucation systems, with the result that by 1870, the liter- source sectors, the likely source of Latin America’s acy rate was only one-third to one-fourth as high as in comparative advantage, were starved of capital and Canada and the United States. Early industrialization workers who were drawn to the heavily subsidized reflected the cumulative impact of numerous small ad- and inefficient manufacturing enterprises. vances made by many individuals, but in Latin Amer- The combination of inefficient industrialization ica, the lack of access to education translated into lim- with the stifling of natural export sectors left many ited innovation and slower technological progress, countries in the region vulnerable to balance of pay- because colonial institutions deemphasized technical ments crises and severely constrained growth. education and universities failed to produce sufficient engineers and scientists through the 19th century. Source: Lederman and Maloney 2007. relaxed and stable regulatory environment, petence associated with a given level of ex- but also many of them are being financed and port of high-tech goods. Nevertheless, the built by private sector investors with access to share of high-tech exports is generally posi- ample funds and outside expertise. tively correlated with other indicators of technological achievement.8 Exports of high-tech goods are only Middle-income countries as a group have a loosely related to incomes much higher share of high-tech exports than One frequently used indicator of the diffu- low-income countries. Within the middle-income sion of recent technology is the share of group, however, the lower-middle-income high-tech goods in total merchandise ex- countries average a higher share of high-tech ex- ports. To be sure, the informational content ports than the upper-middle-income countries of this measure has decreased with the pro- (table 2.8). The East Asian countries have much liferation of relatively low-tech assembly op- higher shares of high-tech exports than the erations of high-tech goods, which in turn other regions, and the Middle East and North has reduced the level of technological com- Africa region has much lower shares than the 71 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table 2.7 Diffusion of recent technologies Internet users Internet bandwidth Broadband subscribers Percentage change Percentage change Percentage change 2005 1999–2005 2004 1999–2004 2005 2001–05 Regions (per 1,000 people) (megabytes/second) (per 1,000 people) East Asia and the Pacific 89 48 8,735 149 26 236 Europe and Central Asia 190 48 6,670 132 21 208 Latin America and the Caribbean 156 41 4,513 121 16 89 Middle East and North Africa 89 64 899 91 — — South Asia 49 66 2,249 114 1 131 Sub-Saharan Africa 29 42 114 62 — — Income groups World 137 20 43,856 108 42 59 High-income countries 527 14 121,433 107 163 45 Upper-middle-income countries 196 36 5,611 126 21 147 Lower-middle-income countries 95 50 5,533 134 23 187 Low-income countries 44 72 708 120 1 143 Personal computers Cellular subscribers Digital cellular subscribers Percentage change Percentage change Percentage change 2004 1997–2004 2004 1995–2004 2004 1999–2004 Regions (per 1,000 people) (per 100 people) (per 1,000 people) East Asia and the Pacific 38 26 24 58 257 54 Europe and Central Asia 98 20 44 79 512 43 Latin America and the Caribbean 88 17 32 51 337 42 Middle East and North Africa 48 17 13 73 142 70 South Asia 12 29 4 87 40 88 Sub-Saharan Africa 15 11 8 61 83 47 Income groups World 130 14 28 37 284 29 High-income countries 579 12 77 28 768 19 Upper-middle-income countries 113 18 48 58 521 37 Lower-middle-income countries 45 23 24 61 255 54 Low-income countries 11 25 4 92 43 88 Sources: World Bank; World Development Indicators. Note: Period growth rates are compound annual growth rates. — ϭ not available. other predominantly middle-income regions. In cent). The average share for individual coun- part these differences reflect the impact of long- tries in Latin America and the Caribbean is standing policies in several East Asian countries 8.6 percent, with high-tech exports represent- that emphasized exports of increasingly sophis- ing 7 percent or less of the total merchandise ticated products and these countries’ proximity exports of Argentina, Colombia, Honduras, to transport corridors that facilitated their par- Nicaragua, and Paraguay. ticipation in international production networks. Although well below half the level of East Personal computers have diffused Asia and the Pacific, Latin America and the relatively slowly . . . Caribbean’s share of high-tech exports relative Personal computers (PCs) are among the re- to the total of manufactured exports of 13 per- cent technologies for which data exist for a cent in 2004 was larger than that of the other wide number of countries. PCs are a relatively regions (table 2.8). This mainly reflects a high new technology that, despite their present-day share of high-tech exports in Mexico (20 per- ubiquity in high-income countries, have 72 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Table 2.8 Share of high-tech products Nevertheless, three-quarters of low-income in total exports countries have 15 or fewer PCs per 1,000 peo- (high-tech exports as a percent of manufactured exports) ple and one-quarter have fewer than 5 per 2004 1999–2004 1,000 people. Yet, several low-income coun- tries have substantially more. Mongolia, for Percentage example, reports having 133 PCs per 1,000 Regions point change East Asia and the Pacific 33.4 2.7 people, illustrating that even though the density Europe and Central Asia 8.7 Ϫ0.7 of PC ownership is correlated with income, Latin America and the Caribbean 13.1 Ϫ1.4 substantial variations exist across countries at Middle East and North Africa 3.2 Ϫ0.4 South Asia 4.1 0.5 similar income levels. Sub-Saharan Africa — — Income groups . . . while diffusion of the Internet and World 21.3 Ϫ0.4 mobile phones has been extremely rapid High-income countries 22.3 Ϫ0.4 Upper-middle-income countries 16.2 Ϫ3.1 The penetration of Internet use, a more recent Lower-middle-income countries 22.2 4.0 technology,10 offers an interesting comparison Low-income countries — — (figure 2.5). Internet bandwidth consumption Sources: Centre d’Etudes Prospectives et d’Informations and the number of broadband subscribers Internationales; World Bank. Note: — ϭ not available. more than doubled from 1999 to 2004 in both middle- and low-income countries. High- income countries have almost as many PCs per capita as there are Internet users in devel- oping countries, which have twice as many actually diffused relatively slowly throughout Internet users as PCs. The ratio rises as per the world since their introduction in the capita incomes decline, with four times as 1980s, at least compared with the speed at many Internet users as PCs in the Middle East which the use of mobile phones and the Inter- net has spread. Thus in 1995, France had just under 145 computers per 1,000 inhabitants, fewer than half as many as in the United States Figure 2.5 The incidence of Internet use at the time (325) and roughly the same as in varies widely across countries Hungary today. France now has 575 comput- Internet users per 1,000 people, 2004 ers per 1,000 inhabitants, compared with 762 600 in the United States, and many developing 500 countries in Europe and Central Asia and Latin America have PC ownership rates simi- 400 lar to Hungary’s. Indeed, the regional average 300 for Europe and Central Asia is brought down by low penetration rates in Turkey and 200 Ukraine (the second and third most populous 100 countries in the region, respectively), which have only 52 and 28 computers per 1,000 in- 0 0 5,000 10,000 15,000 20,000 dividuals, respectively. If we use the simple av- GDP per capita PPP (current $) erage of the penetration rate in individual countries in the region, there are about 150 East Asia and the Pacific Europe and Central Asia computers per 1,000 people, with many coun- Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa tries posting penetration levels close to the un- weighted average for high-income countries Sources: World Bank; World Development Indicators. (460 PCs per 1,000).9 73 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 and North Africa and South Asia. The capac- countries. Although lack of competition and ity to share an Internet connection, either for- difficulties innovative entrepreneurs encoun- mally through a commercial venture such as tered in getting licenses slowed the initial dif- an Internet café or informally, makes Internet fusion of mobile phone technology, much has use much more affordable than owning a PC changed in recent years (Sullivan 2007). and lies at the root of this difference. Mobile phone ownership rates in developing A lack of infrastructure helps explain weak countries—even in the poorest countries—are penetration rates in some low-income coun- rising rapidly, having almost doubled in low- tries. For example, even though Internet pene- income countries between 2000 and 2004. In- tration rates rose by 41 percent in Sub- deed, new subscribers are signing up at such a Saharan Africa from 1999 to 2005, Internet fast pace that the data in table 2.7 are already penetration in the region remains the lowest broadly out of date. among developing regions, in part because no Because the market is evolving so rapidly, high-speed, low-cost backbone exists to con- with new applications for mobile phone nect eastern and central Africa to the rest of technology being developed on a regular basis, the world. As a result, Internet transactions evaluating its overall impact is difficult. Pene- must be made via satellite, which provides tration rates in Europe and Central Asia and lower bandwidth at higher cost than fiber op- Latin America and the Caribbean are already tics (Kenyan call center operators pay $7,000 high, rivaling those observed in high-income per megabyte of bandwidth compared with countries less than 10 years ago. Penetration around $500 for operators connected by fiber rates in East Asia and the Pacific are somewhat optic cable in India). As a result, prospects for lower on average; however, looking at only the Sub-Saharan Africa are expected to improve middle-income countries in the region and ex- following the recent installation of a fiber cluding small island economies, the average optic backbone along the western coast of the penetration rate in East Asia and the Pacific continent and the expected completion of a is higher than in Latin America and the similar backbone along the eastern coast Caribbean. Penetration rates in low-income in 2008. countries are much lower, on average, al- Technology is also providing solutions for though some countries have reached levels overcoming infrastructure costs. In a number comparable to those in middle-income coun- of countries, wireless broadband connections tries. As of 2005, six Sub-Saharan African are outpacing digital subscriber line (DSL) and countries (Botswana, Gabon, Mauritius, the cable as a mechanism for distributing Internet Seychelles, Sierra Leone, and South Africa) had access to customers. So-called 3G mobile mobile phone penetration rates above 30 per- phones already provide reasonable bandwidth cent. Although penetration rates in South Asia in many countries, while more advanced stan- are also low, the large populations of these dards offer hope for even faster implementation countries and the pace at which firms are and diffusion. Some 23 developing countries are adding customers means that globally, a sub- planning to, or already have begun to, deploy stantial proportion of new mobile phone WiMax systems, a wireless, broadband Internet subscribers comes from developing countries.11 standard touted as the successor to today’s WiFi The rapid penetration of mobile phone and 3G systems. Those with existing WiMax technology reflects in part the process by implementations include the Dominican which it has been financed. Unlike most fixed- Republic, Pakistan, South Africa, and Uganda. wire telephone systems, railroads, and electri- The ability to share the fixed costs of a mo- cal grids, mobile phone technology has been bile phone and its monthly subscription costs, introduced into most developing countries by along with its portability, have facilitated the well-funded private operators working within diffusion of this technology in developing a relatively competitive environment. As a 74 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S result, the creation of the necessary infrastruc- of sectors, increasing producers’ revenues and ture for these systems has not been held back lowering consumers’ costs (albeit at the ex- by the government financing and bureaucratic pense of middlemen). In addition, this technol- constraints that slowed the diffusion of older ogy is increasingly being used to enable a de- technologies. Moreover, microfinance tech- gree of arm’s-length financial intermediation niques have facilitated expansion of the de- that many argue is critical to development, but mand side of the business (Sullivan 2007). that has largely been unavailable in the past The technological and economic implica- because of a lack of infrastructure (box 2.8). tions of the rising penetration of mobile phones are only now being assessed. In poor, rural The diffusion of new technologies has areas, where the transportation of goods and encouraged rapid growth in business people is heavily constrained by poor infra- services structure, the introduction of cheap, personal The Internet, greater availability of comput- communications may be of great value both as ers, and faster communications have com- a substitute for moving people and to assure bined to greatly expand the potential for de- that the movement of people or goods is worth- veloping countries to supply services from a while. In particular, the availability of relatively distance in a process called offshoring. Ini- cheap and efficient communications has re- tially offshoring services were concentrated on duced informational asymmetries in a number lower-end software services and business Box 2.8 Innovative use of communications technology is improving financial access for the poor T he poor confront considerable challenges in gain- ing access to well-functioning savings and pay- ments services. Financial institutions do not exist in Transaction Systems in Uganda is introducing a similar, but more sophisticated scheme. A system developed by Celpay allows clients in the Democratic many rural areas, and those that do often impose Republic of Congo and Zambia to use their mobile high minimum balance requirements (reflecting high phones to pay bills. The client establishes an account unit transaction costs for small accounts) that are with Celpay and can then make purchases by texting well beyond the reach of poorer households. How- a request to Celpay, which will transfer money to the ever, the adaptation of technology has allowed some merchant’s account. Security is provided by the use innovative financial institutions in Sub-Saharan of a personal identification number, which is needed Africa to extend financial outreach to the poor. to complete the transaction. For example, the Equity Bank in Kenya has out- In a series of surveys of banking services in three fitted a series of vans with laptops and telecommuni- middle-income and four low-income countries, Bank- cations facilities to act as mobile banking units. It able Frontier Associates (2007) found that even has also designed flexible savings mechanisms with though only 1.5 percent of the adult population in emergency loan facilities. Teba Bank of South Africa South Africa was using mobile phone banking, the has developed a smart card that uses existing mobile potential for the service was large. Between 7 and phone technology to provide low-cost, electronic 41 percent of the unbanked population of the coun- banking services (savings and payments) for low- tries surveyed (Botswana, Kenya, Namibia, South income customers. The program was originally de- Africa, Tanzania, Uganda, and Zambia) has access veloped to handle wage payments for migrant work- (including shared access) to a mobile phone, and ers. The value of the cards can be topped up or the these penetration rates are rising. cards can be used to make purchases at any of the simple wireless terminals that have been placed in shops frequented by low-income clients. Remote Source: Bankable Frontier Associates 2007; World Bank 2007c. 75 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 processes as well as call centers. More re- the sophistication of the services they deliver cently, offshoring has moved into such areas even as their costs rise. This development un- as investment and financial services, human derlines a major message for policy makers resources, health services, retail functions, and businesses in developing countries: im- logistics, and customer support functions proving the skills of the labor force by devot- (World Bank 2005). In addition to increasing ing more resources to education and training, demand for labor and boosting export rev- along with improving the overall climate for enues, offshoring of services to developing investment, is essential for competing in tech- countries can improve their incentives to pro- nologically sophisticated markets. vide education and training, help improve the quality of services provided domestically, en- Logistics represent an important courage technology and knowledge transfers, process technology and minimize (compared with manufacturing) As noted earlier, the spread of modern com- the environmental consequences of economic munications technology and the diffusion of growth. By one account, the most attractive computers, coupled with quality improve- locations for offshoring global services (based ments in transportation services, have com- on costs, the availability of workers with appro- bined to greatly improve the rapid and effi- priate skills, and the overall business environ- cient delivery of goods and services, enabling ment) include Brazil, Chile, China, the Czech just-in-time inventory processing and more ef- Republic, India, Malaysia, the Philippines, ficient supply chain management (this subsec- and Thailand (A. T. Kearney 2007). As the tion is based on Arvis and others 2007). The complexity of services offshored increases, World Bank’s logistics performance index pro- geographic proximity to major markets has vides an overall evaluation of the perceived so- become more important and has provided phistication with which countries are able to greater opportunities, for example, for the deliver goods and services (figure 2.6). It con- Czech Republic to supply Western Europe and tains several subindexes that measure services for Mexico to supply Canada and the United critical to logistics, including customs, infra- States. The advantages of fluency in English structure, ability to track shipments, and busi- and French, along with shared time zones, have ness processes (competence) along with the increased the potential for African countries to timeliness and cost of deliveries of domestic supply services to the European market.12 logistics companies (table 2.9). While India has dominated the outsourcing The overall quality of logistics services is market, rapid expansion of the business may clearly correlated with income. The top per- be running into capacity constraints as the formers are high-income countries (Singapore, pool of unemployed and underemployed with an index of 4.19, ranks number 1), while skilled workers dries up and wages are bid the worst performers are the poorest countries up.13 Eventually, rising labor costs may partly that are landlocked or that suffer from severe erode the advantage of the current major off- governance problems or conflict (Afghanistan, shore centers, providing greater room for with an index of 1.21, ranks last). On average, competition from poorer countries. A recent low-income countries score significantly lower survey found that the relative cost advantage than middle-income countries. of the leading offshore destinations fell in Nevertheless, index levels show consider- 2006 (A. T. Kearney 2007). However, partly able dispersion among countries with similar because of learning by doing, these countries’ income levels. Countries where trade has scores along other dimensions, including peo- played a significant role in promoting growth ple skills and the business environment, have (for example, Chile, China, India, Malaysia, increased. As a result, they have been able to South Africa, Thailand, and Vietnam) tend to move up the value added ladder by increasing score high relative to their income level. 76 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Vietnam, a low-income country, ranks 53rd manufacturing sector in these latter countries among 150 countries, or slightly above the av- tends to reduce the political impetus for the re- erage for upper-middle-income countries. In forms that would improve logistics. Ultimately, contrast, countries where growth has been gen- countries that achieve high scores on the logis- erated by oil and mineral assets, for example, tics performance index are those that have Algeria, Bahrain, and Saudi Arabia, score low vigorously pursued reforms to improve the ef- relative to income. The absence of a strong fectiveness of public sector institutions and to Table 2.9 The quality of logistics services in 2005 varies by income (score on logistics performance index) International Logistics Tracking and Domestic Overall Customs Infrastructure shipments competence tracing logistics costs Timeliness Regions (Index) East Asia and the Pacific 2.58 2.41 2.37 2.64 2.54 2.53 3.04 3.01 Europe and Central Asia 2.59 2.39 2.39 2.61 2.53 2.55 2.97 3.04 Latin America and the Caribbean 2.57 2.38 2.38 2.55 2.52 2.58 2.97 3.02 Middle East and North Africa 2.42 2.24 2.27 2.44 2.33 2.35 2.95 2.88 Sub-Saharan Africa 2.35 2.21 2.11 2.36 2.33 2.31 2.98 2.77 South Asia 2.30 2.06 2.07 2.28 2.32 2.32 3.12 2.73 Income groups High-income countries 3.67 3.45 3.66 3.52 3.64 3.71 2.58 4.05 Upper-middle-income countries 2.85 2.64 2.70 2.84 2.80 2.83 2.94 3.31 Lower-middle-income countries 2.47 2.31 2.27 2.48 2.40 2.45 3.01 2.93 Low-income countries 2.29 2.12 2.06 2.32 2.29 2.25 2.99 2.71 Source: Arvis and others 2007. Note: The maximum score attainable is 5; the minimum is 1. 77 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 encourage the efficiency of private sector insti- 2000a, 2000b, 2000c; McKenzie 2003; tutions through competition.14 Montgomery and others 2000; Vyas and Among the components of the index, assess- Kumaranayake 2006), in poverty analysis ments of the quality of infrastructure, the qual- (Sricharoen and Buchenrieder 2005), in regu- ity of services, and the ease of customs clear- latory policy analysis (Nicoletti, Scarpetta, ance processes are highly correlated across and Boylaud 1999), in constructing cross- countries. In contrast, the cost of services varies country measures of capital controls (Chinn less across countries (with the exception of and Ito 2006) and in the analysis of e-readiness markedly high road freight rates in Sub- in India (Government of India 2006). It Saharan Africa) and thus makes a more limited contrasts with most existing efforts to contribution to cross-country differences in the construct overall indexes of technological overall index. This highlights the importance of achievement, which tend to aggregate the speed and reliability of shipping in globally subindexes using arbitrary weights with a integrated production networks. Interestingly, weak theoretical or empirical basis, by using the gap between the best and worst performers the statistical properties of the underlying data in relation to the overall assessment of the reli- to determine the weights used in calculating ability of the supply chain is twice the average the summary and overall indexes. Principal gap across various dimensions of supply chain components analysis is used to generate performance. The reliability of the supply chain aggregate indexes at two points in time, tends to be determined by its weakest link. the early 1990s and the early 2000s,16 for scientific innovation and invention, the Evaluating overall technological penetration of older technologies, and progress the penetration of newer technologies. These summary indexes are then combined with an T he preceding sections of this chapter have discussed technological achievement in de- veloping countries along three dimensions: sci- index of the extent to which countries are exposed to foreign technologies (through entific innovation and invention, the diffusion trade and FDI), which is developed in of old technologies, and the diffusion of new chapter 3, to generate an aggregate index of technologies. In this section we calculate sum- technological achievement. Table 2.10 lists the mary indexes of technological achievement indicators that are summarized in both the along each of these dimensions, as well as an overall index and each of the summary overall index that combines these subindexes subindexes. The technical annex to this with additional information about the extent chapter explains the steps taken to calculate to which countries are exposed to technology these weights in more detail. through trade and FDI, issues that are dis- cussed in more detail in chapter 3. The relationship between technological achievement and income varies depending Summary indicators for scientific on the dimension observed innovation and technology Figure 2.7 reports the distribution of the sum- penetration mary subindex for each of the three dimensions of technological achievement discussed in this A statistical approach to summarizing chapter (the summary index of the extent of ex- technological progress posure to foreign technologies is presented in In creating the summary indexes, a statistical chapter 3). A quick glance reinforces the earlier technique, principal components analysis, is conclusion that, by and large, developing coun- used to combine subindicators in a flexible tries are not participating in scientific innova- manner.15 This approach has been widely used tion at the technological frontier. Indeed, only a in health economics (Gwatkin and others handful of countries, eight of which are former 78 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Table 2.10 Indicators included in summary indexes of technological achievement Indicator Measure Source Scientific innovation and invention Scientific and technical journal articles population World Development Indicators Patents granted by the U.S. Patent and Trademark Office population Lederman and Saenz 2005 Patents granted by the European Patent Office population Lederman and Saenz 2005 Penetration of older technologies Group A Electrical power consumption kilowatt-hours/capita World Development Indicators International outgoing telephone traffic minutes World Development Indicators Air transport, registered carrier departures worldwide % of GDP World Development Indicators Agricultural machinery: tractors per 100 hectares of arable land World Development Indicators Group B Main lines per 100 inhabitants World Development Indicators Exports of manufactures % of merchandise exports World Development Indicators Medium-tech exports % of merchandise exports CEPII BACI database Penetration of recent technologies Internet users per 1,000 people World Development Indicators Personal computers per 1,000 people World Development Indicators Cellular subscribers per 100 inhabitants World Development Indicators Percentage of digital mainlines World Development Indicators High-tech exports % of total exports CEPII BACI database Exposure to external technology FDI net inflows % of GDP World Development Indicators Royalties and license fee payments % of GDP World Development Indicators Imports of high-tech goods % of GDP CEPII BACI database Imports of capital goods % of GDP CEPII BACI database Imports of intermediary goods % of GDP CEPII BACI database Source: World Bank. Note: BACI ϭ Banque analytique de commerce internationale, CEPII ϭ Centre d’Etudes Prospectives et d’Informations Internationales, EPO ϭ European Patent Office, FDI ϭ foreign direct investment, GDP ϭ gross domestic product, USPTO ϭ United States Patent and Trademark Office. Soviet bloc countries, have anything like the The distribution of technological achieve- same level of at-the-frontier scientific activity ment across the other indicators (diffusion of as the high-income countries. While this may old innovations and of new innovations) is reflect an innate bias in the indicators used also skewed toward high-income countries, but (number of journal citations and patent appli- much less so. Thus the intensity with which cations), the results are consistent with the view upper-middle-income countries exploit both that most technical progress in developing older and newer technologies is between 50 countries occurs through the adaptation and and 60 percent of the level in high-income adoption of new-to-the-market or new-to-the- countries. This ratio is between 30 and 40 per- firm technologies rather than through the cent for lower-middle-income countries and is creation of new-to-the-world technologies. about 23 percent for low-income countries Moreover, notwithstanding that some firms— (table 2.11). However, the dispersion of the and even some cities—in developing countries summary indicator of the penetration of older do participate actively at the technological technologies within income groups is very frontier, when viewed from the national level, wide. Many low-income countries report not even the most advanced developing coun- higher utilization rates for older technologies tries participate at levels comparable to those than do many upper-middle income countries. prevalent in high-income countries. This report suggests that other factors—such as 79 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 2.7 Distribution of technological achievement by dimension Scientific innovation and invention (2000–03) Index 0.25 0.20 0.15 0.10 0.05 0 High-income Upper-middle-income Lower-middle-income Low-income countries countries countries countries Penetration of older technologies (2000–03) Index 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0 High-income Upper-middle-income Lower-middle-income Low-income countries countries countries countries Penetration of recent technologies (2000–03) Index 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0 High-income Upper-middle-income Lower-middle-income Low-income countries countries countries countries Source: World Bank. 80 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Table 2.11 Technological achievement in Table 2.12 Increase in technological developing countries relative to that in achievement in developing countries high-income countries relative to that in high-income countries (percent of level in high-income countries) (index, percent increase in high-income countries = 100) Scientific Penetration Penetration Scientific Penetration Penetration innovation and of older of recent innovation and of older of recent invention technologies technologies invention technologies technologies High-income countries 100.0 100.0 100.0 High-income countries 100.0 100.0 100.0 Upper-middle-income Upper-middle-income countries 3.3 58.4 49.6 countries 191.6 220.8 162.3 Lower-middle-income Lower-middle-income countries 0.6 41.6 31.8 countries 157.1 251.8 145.8 Low-income countries 0.1 23.7 22.7 Low-income countries 63.7 480.4 411.3 Source: World Bank. Source: World Bank. history, effectiveness with which governments than in high- and middle-income countries, have delivered some public sector technological implying that the technology gap for these services, and past turmoil—may have had a countries is either stable or widening. greater influence than income in explaining the Not surprisingly, the most rapid increases in integration of these technologies into their technological achievement recorded over the economies.17 In contrast, the diffusion of recent past decade or so are for more recent technolo- technologies is more correlated with income gies, whose starting points are relatively low and shows both much less variation and less even in high-income countries (figure 2.8). overlap across income groups. These results are Clear indications of catch-up are evident for consistent with the view that nonfinancial im- newer technologies, with the penetration rates pediments to technological diffusion have con- in upper-middle-income countries increasing strained the diffusion of more recent technolo- 1.5 times as quickly as in high-income countries. gies by less than they have for older ones. The pace of increase among low-income coun- In terms of scientific innovation and inven- tries was more than four times as rapid, but this tion, middle-income countries have been catch- reflects, to a significant degree, very large per- ing up, at least in relative terms, but as already centage improvements in a few countries that noted, the gap between them and high-income started off with very low levels. Notwithstand- countries remains large. In addition, the gap ing these caveats, most developing countries are between most low-income countries and the maintaining pace with high-income countries technological frontier has widened further and many, especially among the upper-middle- both in relative and in absolute terms. income countries, are gaining ground. The story on the diffusion of technology is more encouraging. On average, in middle- New technologies are not as diffused as income countries older technologies are dif- old technologies, but the gap between fusing at 2.5 times the rate as in high-income income groups is smaller countries and more than four times as fast as Overall, the penetration of recent technologies in low-income countries (table 2.12). While in the economic life of developing countries is this result appears to be robust for middle- less extensive than for older technologies, income countries (figure 2.8), the variance is which is entirely understandable given the much higher among low-income countries. length of time that has passed since the older Several low-income countries have recorded technologies were introduced. Nevertheless, substantial increases in technological progress, the gap between countries at different income for example Benin, Ghana, and Togo record levels is not as striking as one might expect. more than 100 percent improvements. In many Many upper-middle-income countries have others, however, progress has been slower achieved levels of technological achievement 81 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 2.8 Increase in summary technological achievement subindexes, 1990s–2000s Scientific innovation and invention Percent change in index, 2000–03 over 1990–93 1,600 1,400 1,200 1,000 800 600 400 200 0 Ϫ200 High-income Upper-middle-income Lower-middle-income Low-income countries countries countries countries Penetration of older technologies Percent change in index, 2000–03 over 1990–93 350 300 250 200 150 100 50 0 Ϫ50 Ϫ100 High-income Upper-middle-income Lower-middle-income Low-income countries countries countries countries Penetration of newer technologies Percent change in index, 2000–03 over 1990–93 50 40 30 20 10 0 High-income Upper-middle-income Lower-middle-income Low-income countries countries countries countries Source: World Bank. Note: Countries are ranked according to the level of technological achievement in 2000. 82 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S similar to those in high-income countries, summary indicator that measures the extent to and substantial overlap is apparent between which economies are using imported technol- upper- and lower-middle-income countries ogy in their production processes. The under- and between lower-middle-income and low- lying components and their recent evolution income countries. Interestingly, the clear ad- are discussed in more detail in chapter 3 in the vantage countries in Europe and Central Asia context of the channels by which external enjoy along other dimensions of technological technology is transmitted to developing coun- achievement is less marked here, with East tries. These overall summary indexes are cal- Asian countries performing better than might culated using the same basic technique used to be expected. calculate the subindicators (see the technical annex to this chapter for details), with one difference: rather than using the raw data as Overall technological achievement inputs, the previously calculated summary in- To understand overall technological achieve- dicators are used. ment, two alternative summary indexes were Figure 2.9 reports levels of technological generated. The first combines the three sum- achievement in 2000 according to these two mary subindicators of achievement discussed summary indicators. The country coverage earlier, while the second includes an additional differs somewhat between the two indexes. To Figure 2.9 Alternative summary indexes of technological achievement (2000s) Technological achievement, excluding external channels Index 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0 High-income OECD High-income Upper-middle-income Lower-middle-income Low-income countries non-OECD countries countries countries countries Overall technological achievement index Index 0.25 0.20 0.15 0.10 0.05 0 High-income OECD High-income Upper-middle-income Lower-middle-income Low-income countries non-OECD countries countries countries countries Source: World Bank. 83 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 be included, each country must have data for group, and scores for countries at roughly the all variables, and as additional variables are same income level show substantial disper- added, some countries are lost from the sam- sion. Overall, the relationship between tech- ple. Reflecting this requirement, only 20 low- nological achievement and income per capita income countries are included in the first is nonlinear, with the rise in technological index and 16 in the second, down from 46 in achievement tending to flatten out for coun- the case of the subindicator with the best cov- tries with per capita incomes between $10,000 erage.18 Although these are relatively diverse and $25,000, a group that includes upper- groups of countries, they cannot be considered middle-income countries and some of the less representative of all developing countries. Par- wealthy high-income countries such as Greece ticular care should be taken in extrapolating and Portugal. Countries in Latin America results derived from these countries to all low- have weak technology scores given their in- income countries. come levels. Despite the perceived technologi- cal prowess of countries in East Asia, except Countries with similar income levels can for Malaysia, the highest-scoring country in have very different levels of technological the region, the developing countries in the re- achievement gion do not particularly distinguish them- While the influence of income on technologi- selves, in part because technological diffusion cal achievement is well established, consider- in these countries remains concentrated in a able variation occurs within income groups few urban centers and has not diffused widely (figure 2.10). The top performers within de- elsewhere. veloping country income groups achieve a Focusing only on developing countries in technology rating about equal to that of the the second panel of figure 2.10, the correla- median country in the next highest income tion with income remains, but the same Figure 2.10 Technological achievement rises with income levels All countries Developing countries only Index Index 0.30 0.25 Europe and Central Asia 0.25 0.20 Europe and Central Asia 0.20 All countries 0.15 0.15 0.10 0.10 0.05 0.05 Latin America and the Caribbean Latin America and the Caribbean 0 0 Ϫ0.05 Ϫ0.05 Ϫ0.10 Ϫ0.10 0 00 00 00 00 00 00 0 0 0 0 0 0 00 00 0 0 0 0 0 00 00 00 00 00 00 00 00 00 00 ,0 ,0 ,0 ,0 ,0 ,0 ,0 ,0 5, , 2, 4, 6, 8, , , , , 10 15 20 25 30 35 40 10 12 14 16 18 20 Per capita income (PPPs) Per capita income (PPPs) East Asia and the Pacific Europe and Central Asia High-income OECD countries High-income other countries Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Source: World Bank. 84 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S tendency for a flattening in the relationship is $5,500. While not conclusive, these results are still observable. For countries in Latin Amer- consistent with a view that other factors, such ica and the Caribbean, the relationship be- as technological absorptive capacity (see chap- tween technological achievement and income ter 3) limit the level of technological achieve- per capita flattens out at even lower income ment that some developing countries can levels, while for countries in Europe and Cen- attain even as incomes continue to rise. tral Asia, the pattern follows more closely that of the overall sample, which includes high- income countries. Among developing countries Technological convergence appears to be (excluding those in the Europe and Central constrained by weak absorptive capacity Asia region), technological achievement flat- in some regions tens out at an index level of around 0.15 for Figure 2.11 reports values for the two overall countries with per capita incomes around summary indexes at two points in time, Figure 2.11 Comparison of levels of technological achievement, early 1990s and early 2000s Technological achievement, excluding external channels Index 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0 High-income OECD High-income Upper-middle-income Lower-middle-income Low-income countries other countries countries countries countries Overall technological achievement index Index 0.25 0.20 0.15 0.10 0.05 0 High-income OECD High-income Upper-middle-income Lower-middle-income Low-income countries other countries countries countries countries 1990s 2000s Source: World Bank. 85 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 roughly the early 1990s and the early 2000s. possible, some commonalities do emerge Both indexes offer a broadly consistent view from this subsample, namely: of technological achievement. They both con- firm that the absolute size of the increases in • The absolute increase in the overall technological progress over the decade is index of technological achievement for larger among higher-income countries than low-income countries is about the same lower-income countries, but that the relative as for lower-middle-income countries improvement in developing countries has out- (and thus the percentage increase in paced that in high-income countries, implying low-income countries is much greater), that catch-up is occurring. strongly suggesting a catch-up effect The extent of apparent catch-up is strongest relative to the lower-middle-income when considering the narrower definition of countries (table 2.13). technological achievement that includes only • The percentage increase in achievement scientific inputs and the penetration of old along the scientific innovation and in- and new technologies. According to this mea- vention dimension for all eight Sub- sure, low-income countries for which data Saharan African countries for which data are available have shown the largest percent- are available, along with Bangladesh age improvement. If changes in the extent to and India, lies well below the average which countries are making use of external for middle-income countries. Only Viet- technologies through imports and FDI are nam approaches the performance of included, the extent of convergence declines middle-income countries. for all developing country groups except the • The picture for the diffusion of old inno- upper-middle-income countries. This finding vations is decidedly more mixed, with 5 of reflects that high-income countries have also increased their imports of high-tech goods Table 2.13 Overall technological progress and have also benefited technologically from in absolute and relative terms the operation of technologically sophisticated Technological achievement excluding Overall technological foreign-owned firms on their soil. However, external channels achievement trade may contribute more to technological (Percent change in the index) improvement in the South than in the North High-income 94 77 (Lumenga-Neso, Olarreaga, and Schiff Upper-middle-income 127 109 2005). Lower-middle-income 137 103 Low-income 227 161 Among upper-middle-income countries, Low-income catch-up is particularly strong in Chile, Hun- (excluding Sudan) 160 124 gary, and Poland, where the level of techno- (Percent change relative logical achievement rose by more than to high-income countries) 125 percent during the 1990s. For most High-income 100 100 countries the pace of convergence was much Upper-middle-income 135 141 Lower-middle-income 146 133 slower. As indicated earlier, relatively weak Low-income 241 208 data coverage across low-income countries Low-income makes generalizing about their progress diffi- (excluding Sudan) 170 160 cult. Only 16 low-income countries (10 in the (Absolute change in the index) case of the summary index that includes im- High-income 0.096 0.068 ports of technology and FDI) have sufficient Upper-middle-income 0.057 0.046 Lower-middle-income 0.036 0.028 data for both the early 1990s and the early Low-income 0.024 0.022 2000s to permit an estimate of their rate of Low-income technological progress. Although generaliza- (excluding Sudan) 0.024 0.022 tions to all low-income countries are not Source: World Bank. 86 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S 16 low-income countries showing stagna- governance structure, and the infrastructure tion or declines in the index between the (Howitt and Mayer-Foulkes 2005; Klenow early 1990s and early 2000s, while 6 and Rodriques-Clare 2004; Lederman and recorded large percentage increases, com- Saenz 2005). According to this view, technol- parable to those displayed by the more ogy in a country tends to converge toward a successful middle-income countries. level consistent with the country’s technologi- • Even for the diffusion of recent innova- cal adaptive capacity. As a result, countries tions, where successful examples of mo- may experience relatively rapid technological bile phone and Internet diffusion have progress for a period, but may subsequently been much publicized, only 5 of 25 low- stagnate at a given level unless they take steps income countries (Guinea, Mongolia, to further raise their technological adaptive Pakistan, Sudan, and Zimbabwe) capacity. Chapter 3 develops the components achieved increases in the index that of technological adaptive capacity and de- exceeded the middle-income average. scribes trends in developing countries. However, low-income countries did in- crease penetration rates for recent inno- vations more quickly than high-income countries.19 Given that new technolo- Technological diffusion over gies sometimes substitute for older tech- the long term nologies, such as mobile phones for fixed-line telephones, transmission of in- formation over the Internet for trans- S o far, we have emphasized the technological performance of countries at different in- come levels over the recent past. Thanks to a mission involving travel and telephones, new data set developed by Comin and Hobijn the previous finding suggests that the (2004), we can now analyze the process of overall pace of convergence in low- technological diffusion over the longer term. income countries may be accelerating, This data set traces the extent of diffusion of particularly as data for 2005 and 2006 some 100 technologies in 157 countries dur- suggest continued high growth in the ing the period 1750–2003.21 For each tech- diffusion of mobile telecommunications nology, only countries for which published and Internet technologies.20 data exist are included, implicitly restricting the sample to countries (and technologies) Econometric evidence supports the view where a significant degree of diffusion has that the relationship between income and occurred. The data analyzed here are further technological diffusion follows an S-curve: restricted to include only those country- technological diffusion is slow at very low technology pairs (a data set with one country incomes, in part because of difficulties in af- and data for 7 technologies would have 7 fording new technologies, in part because low country-technology pairs) where the intensity levels of human capital severely constrain of use has reached at least 5 percent of the av- technological progress. As incomes rise, tech- erage level of the 10 countries with the highest nological diffusion increases rapidly, particu- recorded level of diffusion. Under this restric- larly in percentage terms, because of the low tion, there are 1,181 country-technology base level. At some level of income, however, pairs, 699 of which correspond to developing the pace of technological diffusion slows. One countries, heavily weighted to technologies explanation for this slowdown at higher in- discovered in the late 19th or early 20th come levels is the slow pace of improvement in centuries.22 an economy’s ability to absorb new technolo- Two important points emerge from this gies (its technological adaptive capacity), as analysis. First, the diffusion of technology determined by the level of human capital, the across the globe has accelerated over time. 87 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table 2.14 Successful diffusion has accelerated Period technology was initially discovered Technology 1750–1900 1900–50 1950–75 1975–2000 Number of countries (years following discovery until technology reached 80 percent of reporting countries) Transportation Shipping (steam) 83 21 Shipping (steam motor) 180 57 Rail (passenger) 126 93 Rail (freight) 124 99 Vehicles (private) 96 153 Vehicles (commercial) 63 123 Aviation (passenger) 60 109 Aviation (freight) 60 103 Communications Telegram 91 77 Telephone 99 156 Radio 69 154 Television 59 156 Cable television 50 98 PC 24 134 Internet use 23 151 Mobile phone 16 150 Manufacturing Spindle (ring) 111 50 Steel (open hearth furnace) 125 50 Electrification 78 155 Steel (electric arc furnace) 92 91 Synthetic textiles 36 75 Medical (OECD only) Cataract surgery 251 19 X-ray 93 27 Dialysis 33 29 Mammography 33 18 Liver transplant 28 29 Heart transplant 28 27 Computerized axial tomography (CAT) scan 18 29 Lithotriptor 15 26 Average (excluding medical) 106.9 60.9 23.5 16.0 Average (including medical) 118.9 61.3 25.7 15.5 Source: Calculations from CHAT database (Comin and Hobijn 2004). Table 2.14 reports, for several old and new striking in the communications field, for technologies, the number of years that elapsed which data are relatively good and country between the discovery of the technology and coverage is extensive. Thus telephone and the time it reached 80 percent of the countries telegram services were invented in the middle currently reporting data for that technology.23 of the 19th century, and more than 90 years The acceleration in the pace at which tech- passed before those services reached 80 per- nologies spread across countries is particularly cent of the countries that currently report data 88 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Table 2.15 The pace at which technology diffuses has picked up among successful adaptors 1800–99 1900–50 1950–75 1975–2000 Threshold Threshold Threshold Threshold 5% 25% 5% 25% 5% 25% 5% 25% (years from discovery until threshold reached) Regions East Asia and the Pacific 60 69 23 28 18 21 Europe and Central Asia 91 117 47 57 25 30 18 21 Latin America and the Caribbean 71 105 54 72 30 35 18 21 Middle East and North Africa 97 118 58 67 25 29 18 21 South Asia 52 62 — — — — Sub-Saharan Africa 85 109 56 69 — — 18 21 Income groups High-income OECD countries 63 91 46 60 20 24 13 17 Other high-income countries 95 112 57 65 20 25 15 18 Upper-middle income countries 83 110 51 64 26 31 18 21 Lower-middle-income countries 86 114 57 69 — — 20 22 Low-income countries 56 68 — — World 76 102 52 65 22 26 16 19 Developing countries 84 111 54 67 26 31 18 21 Source: World Bank calculations using the CHAT database (Comin and Hobijn 2004). Note: The sample is restricted to only those 567 country-technology pairings where the 25 percent threshold was reached and that were below 10 percent when they appeared in the database; — ϭ no data. for them. In contrast, mobile phones, comput- years to reach 25 percent. Moreover, the pace ers, and cable television reached 80 percent of of acceleration has increased over time. For the countries that currently report data in less technologies introduced since 1975, a group than 25 years. The same sort of acceleration dominated by electronics and information can be observed for the dissemination of technologies, on average, it took 16 years from transportation, manufacturing, and medical its invention for a technology to reach the 5 technology. percent threshold in a given country, but only Second, and consistent with the first point, another 3 years to reach the 25 percent thresh- technological diffusion appears to accelerate old. Although the pace of diffusion was some- above a certain threshold. Table 2.15 consid- what slower in developing countries than in ers only those country-technology pairs that high-income countries, it too follows the same have reached a level of penetration equal to pattern. Because table 2.15 excludes country- 25 percent of the average level observed in the technology pairs where the 5 percent threshold 10 countries where the technology is employed has been reached, but not the 25 percent most intensively. Looking at the results for the threshold, the recorded diffusion times are world as a whole, the amount of time required probably lower-bound estimates.24 This pat- to go from the 5 percent level to the 25 percent tern is consistent with the existence of signifi- level (averaged across country-technology cant economies of scale and barriers to entry pairs) is much smaller than the time required among these technologies, such that once the to reach the 5 percent level. For example, in barriers are overcome and the technology is in the first half of the 20th century, for a technol- place, scaling up occurs relatively quickly. ogy to reach the 5 percent threshold took, on While diffusion has occurred relatively average, 52 years, but only an additional 13 rapidly among successful diffusers, successful 89 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table 2.16 Slow diffusion means that many developing countries never reach the 25 or 50 percent threshold 1800s 1900–50 1950–75 1975–2000 Threshold Threshold Threshold Threshold 5% 25% 50% 5% 25% 50% 5% 25% 50% 5% 25% 50% (number of country-technology pairs that have reached threshold) Regions East Asia and the Pacific 18 0 0 38 9 3 7 2 1 6 2 0 Europe and Central Asia 56 19 6 47 23 6 40 18 3 23 13 6 Latin America and the Caribbean 80 11 1 95 34 8 31 3 0 19 4 0 Middle East and North Africa 28 4 1 44 16 6 9 1 0 6 2 0 South Asia 7 0 0 11 3 3 0 0 0 1 0 0 Sub-Saharan Africa 27 4 0 83 21 8 11 0 0 12 3 0 Income groups High-income OECD countries 150 114 75 134 93 55 96 87 75 28 26 23 Other high-income countries 25 16 7 28 23 14 14 10 8 7 6 6 Upper-middle-income countries 90 30 6 112 53 16 61 24 4 29 19 6 Lower-middle-income countries 109 8 2 130 38 12 33 0 0 33 5 0 Low-income countries 17 0 0 76 15 6 4 0 0 5 0 0 Total number of country-technology pairs World 391 168 90 480 222 103 208 121 87 102 56 35 Developing countries 216 38 8 318 106 34 98 24 4 67 24 6 Source: World Bank calculations using the CHAT database (Comin and Hobijn 2004). Note: Sample restricted to only those 1951 country-technology pairings that were below 10 percent when they appeared in the database. diffusion is the exception rather than the rule. Slow diffusion within countries reflects For example, of 102 country-technology a nonlinear process pairings first recorded in 1975–2000, only 56 As noted earlier, the surprisingly low level of (55 percent) have reached the 25 percent overall technological achievement in countries threshold and only about 35 (34 percent) have such as China and India contrasts with popular reached the 50 percent threshold (table 2.16). perceptions, which are based on the relative For developing countries, the pace (and ex- technological sophistication of some of the two tent) of diffusion is significantly slower countries’ major cities and trading centers. (lower) than in high-income countries, with However, the same kind of technological diver- only 24 (36 percent) developing countries hav- sity observed across countries is visible within ing reached the 25 percent threshold and only countries as well (see box 2.9 for the case of 6 (9 percent) having reached the 50 percent India). For example, although one might have threshold. This slower diffusion is true even expected India to have scored substantially bet- for extremely old technologies, a result consis- ter than many Sub-Saharan African countries tent with the idea that affordability and com- in overall technological diffusion, in fact, it petency issues are binding constraints on the does not. Several technologically advanced further diffusion of technologies in these cities in India notwithstanding, technologies countries. This result is broadly consistent have not penetrated deeply in many parts of the with the observation that for some groups of Indian countryside. Here the challenge is to put countries, overall technological achievement in place a basic infrastructure in the country- appears to stop increasing after a given level is side that can support the kind of sophisticated reached, and many developing countries may technologies that the elites in the country are thus face severe barriers to achieving acceler- capable of supporting. As one observer put it, ated technological progress. an energy technology revolution must precede 90 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Box 2.9 The technological divide within India L arge segments of the Indian economy are technol- ogy sophisticated. Its high-tech industries are im- portant global players, its premier education and of technological diffusion, R&D expenditures, attain- ment levels of basic and higher education, availability and quality of logistics services, and size of revenues R&D institutions are recognized internationally. and employment in software and other high-tech in- Along with China, it has the largest pool of dustries. In addition, India does not score substan- skilled manpower, including those with degrees in tially better than many Sub-Saharan African countries engineering and other technical disciplines. More- in terms of the overall penetration of technologies. over, India has become one of the world's largest The juxtaposition of India's increasing technologi- markets for telecommunications technology, is a cal prowess and relatively poor access to technology leader among developing countries in exports of soft- in per capita terms largely reflects the limited penetra- ware and information technology-enabled services, tion of technology in rural areas, which account for and has demonstrated its potential to be a major more than 70 percent of the population, but less than player in biotechnology-pharmaceuticals and the 30 percent of GDP. For example, in June 2007 automobile and engineering sectors, with Bangalore tele-density—the number of subscribers (wired and having emerged as a major international center for wireless combined) per 100 individuals—was technological production and innovation. 52.3 percent for urban dwellers compared with 6.5 for Nevertheless, on a per capita basis, India contin- rural inhabitants (see the box figure). Although the gap ues to lag behind middle-income countries in the rate remains large (especially in terms of quality and relia- bility), and indeed, has widened, a surge in rural mo- Urban and rural teledensity bile phone access means that by mid-2007, tele-density (fixed and mobile), India, 1998–2007 in rural India was equal to the level recorded for urban areas in 1998. Older technologies, such as radio, tele- Number of subscribers per 100 people vision, bicycles, and motorized two-wheelers, tend to 60 be more evenly diffused than newer ones, such as mo- 50 bile phones, computers, and the Internet, given the 40 longer time since the former were introduced. Rural areas The digital divide between rural and urban areas 30 promises to narrow over the long term, particularly Cities 20 in high-income states and near major cities. How- ever, in some states, in the more remote rural areas, 10 and among tribal and other linguistic groups that lag 0 behind in economic development, the gap may well 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007a increase over time. Source: Telecommunications and Regulatory Authority of India. a. Estimated. Source: Mitra 2007. any information technology revolution (Fried- especially small ones, tend to use low levels of man 2007). The rise in China’s index of diffu- technology, and only a few operate near the sion of new technologies is almost double that national technological frontier. In most sectors, of India, in part because the more technologi- productivity at the national technological fron- cally backward regions in China have made tier is about five times the mean level for all progress in closing the gap with the more tech- firms (Dutz 2007). For small formal enter- nologically advanced regions on the coast (Jef- prises, average productivity is even lower: ferson, Rawski, and Zhang 2007). about one-sixth of the level at the technological The technology employed by firms within frontier for each sector and only one-eighth sectors in individual countries also exhibits that of top local performers. Smaller informal tremendous variation. In India, most firms, enterprises are likely to be even less productive. 91 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 The skewed distribution of enterprise produc- At the same time, income is not the only tivity implies potentially huge productivity and determinant of technological progress. Al- output increases are possible, if already existing though innovation at the technological frontier within-country knowledge were to diffuse from (as measured by patents and scientific journal top performers to the rest of the economy. articles) drops off quite sharply as income lev- Assuming that domestic competencies were els decline across countries, considerable over- available (or created) to efficiently use the tech- lap among income groups exists in the extent nologies employed by enterprises at the na- of diffusion of old technologies. Thus the most tional frontier, Indian GDP could be 4.8 times advanced middle-income countries demon- higher if those technologies were successfully strate greater technological achievement in old applied by their less productive rivals. Similarly, technologies than the least sophisticated high- in Brazil, the productivity of innovative firms income countries, while the more advanced with more than 10 employees, which account low-income countries rate higher than the for 26 percent of total sales, is, on average, lowest-ranking middle-income countries. 6.5 times higher than that of similarly sized The technological gap between high- firms classified as weakly innovative (which income and developing countries is more pro- account for 11 percent of sales, but 38 per per- nounced for new technologies; however, many cent of employment). developing countries are acquiring new tech- nologies at a more rapid pace than older tech- Conclusion nologies. Given that some new technologies, A ll told, the evidence reviewed in this chap- ter suggests that for most developing coun- tries technological progress is mainly a process such as mobile phones and to some extent computers, are substitutes for old technolo- gies, the rapid diffusion of new technologies of adaptation and adoption of technologies holds promise for a substantial, widespread from abroad rather than the creation of new- advance in technological achievement. This to-the-world technologies. The pace of technol- progress likely reflects several factors: the re- ogy dissemination across countries has picked duction of regulatory constraints on economic up considerably over the past 100 years, and activity that has occurred over the past most technologies are available at some level in 15 years in many developing countries; the en- most countries, but the extent to which tech- abling of private sector investors, who are free nologies are available differs enormously. of local government budget constraints), to Many developing countries made progress in take the lead in implanting many of these tech- closing the technology gap with advanced nologies; the growing incomes in developing countries during the 1990s. However, despite countries that have improved the affordability more rapid improvement in technological of new technologies; and the improvements in achievement among the poorest countries, the technological absorptive capacity of devel- enormous gaps in technological achievement oping countries and the increased exposure to remain. Even upper-middle-income countries international technology through trade flows, have less than one-third of the level of TFP of FDI, and a growing international diaspora. high-income OECD countries, and low-income This last issue is the subject of chapter 3. countries have only 7 percent. The gap in TFP levels between high-income countries and Latin America and the Caribbean, the Middle East Technical Annex: Construction and North Africa, and Sub-Saharan Africa has of the summary indexes widened since 1990. Moreover, the gap be- tween major centers and lesser cities and rural economies remains large even in the most suc- T he summary indexes, the overall index of technological achievement, and the tech- nological adaptive capacity index reported in cessful countries. chapter 3 were calculated by aggregating some 92 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S 34 separate variables, with the weights used in per capita, manufactured exports per the aggregation calculated by principal compo- capita, share of medium- and high-tech nents analysis (see below). This approach activities in manufacturing value added, distinguishes these indexes from most of those and share of medium- and high-tech reported in the literature, which even though products in manufactured exports; they are based on similar underlying base data, • The technology achievement index is use arbitrary weighting schemes with limited published by the United Nations Develop- theoretical or empirical bases (see Archibugi ment Programme (UNDP 2001) and com- and Coco 2005 for a review). bines (a) the indicators of human skills A number of existing measures of technolog- (mean years of schooling in the popula- ical achievement or technological progress em- tion age 15 and older and enrollment ratio phasize inputs into technological advancement for tertiary-level science programs); (b) the (numbers of scientists and engineers, R&D ex- diffusion of old innovations (electricity penditure, or levels of R&D personnel), includ- consumption per capita and telephones ing, in some cases, even more indirect inputs, per capita) and of recent innovations (In- such as the general level of education of the pop- ternet hosts per capita and high- and ulation and governance factors that facilitate medium-tech exports as a share of all ex- the absorption of technology (see, for instance, ports); and (c) the creation of technology UNCTAD 2005). Other measures focus on out- (patents granted to residents per capita puts, that is, on indicators of technological and receipts of royalties and license fees performance, such as the shares of high-tech in- from abroad). The index is constructed as dustries in exports and in manufacturing value simple averages of these indicators within added (UNIDO 2002). Still others focus more subgroups and then across groups. on the mechanisms by which technological • The national innovative capacity index progress is achieved (Sagasti 2003) or techno- (Porter and Stern 2003) focuses on gov- logical learning occurs (Soubattina 2006). A ernment- and firm-level policies associ- noncomprehensive list of prominent technology ated with successful innovation. It is com- indicators includes the following: posed of four subindexes: proportion of scientists and engineers in the population, • The index of innovation capability is innovation policy, innovation linkages published by the United Nations Confer- and what they call the cluster innovation ence on Trade and Development (UNC- environment. The overall index is calcu- TAD 2005) and consists of an un- lated as an unweighted sum of the four weighted average of an index of human subindexes, but the weights assigned to capital (calculated as a weighted average each indicator in the subindexes are de- of tertiary and secondary school enroll- termined by the coefficients obtained ment rates and the literacy rate) and a from a regression of the number of U.S. technological activity index (calculated Patent and Trademark Office patents on as an unweighted average of three indi- the relevant indicators controlling for cators: R&D personnel, U.S. patents total population, the proportion of scien- granted, and scientific publications, all tists and engineers employed, and the per million population). stock of international patents generated • The index of competitive industrial per- by the country between 1985 and 1994. formance is published by the United Nations Industrial Development Orga- Estimating weights for variables nization (UNIDO 2002) and is calcu- using principal components lated as a simple average of four basic All the measures discussed above assign indicators: manufacturing value added essentially arbitrary weights to the different 93 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 indicators included in the indexes, or in the case originating data that explain most of the vari- of regression analysis, use weights derived from ance in the original data set (at the limit, if all specific assumptions about functional forms the eigenvalues were used, all the variance and the data generating process. This report has would be explained). followed a statistical approach, principal com- The first principal component is the linear ponents analysis, to weighting variables. This combination of the underlying data that ac- approach is widely used in health economics counts for the largest amount of variability in (Gwatkin and others 2000a, 2000b, 2000c; the sample, the second principal component is McKenzie 2003; Montgomery and others 2000; the one that accounts for the next largest Yvas and Kumaranayake 2006) and in poverty amount of variance, and so on successively analysis (Sricharoen and Buchenrieder 2005). It until all the variance is explained. All compo- has also been used in regulatory policy analysis nents are orthogonal to (uncorrelated with) (Nicoletti, Scarpetta, and Boylaud 1999) and in each other; therefore each can be interpreted construction of cross country measures of capi- as an underlying force (visible in varying tal controls (Chinn and Ito 2006). Most recently degrees in each original variable). By selecting in the technology field, it has been used in a gov- the n eigenvectors that explain a large share of ernment of India study of e-readiness (Govern- the total variance, the overall dimensionality ment of India 2006). Principal components of the data set can be reduced to n. analysis permits the calculation of weights for It is assumed that the main correlate in the each indicator included in the overall index in an underlying data reflects some form of techno- objective manner, with the weights being deter- logy and therefore that the principal compo- mined by the data—not by subjective judgment. nents can be used as an index of technology. This Principal components analysis is a statistical is essentially the same process as taking a simple technique for reducing the dimensionality of average of several indicators, but with the data, thereby summarizing the informational attached weights being determined by the data content in a large set of data by calculating or- rather than being imposed by the researcher. thogonal linear combinations of the original As a large set of indicators are used that data series. Essentially, it is a procedure that reflects a wide array of country characteris- helps to reduce the number of variables in the tics, more than one principal component is re- analysis by calculating combinations of the un- quired to adequately capture the information derlying series that contain most of the informa- in the overall data set. One approach would tion in the larger data set. It involves an exami- be to calculate each of these purely data- nation of the correlation matrix for the variables driven, but necessarily arbitrary, components and the extraction of the principal components and use them to calculate the overall index. of the data obtained from the eigenvectors of the An alternative approach that uses a multistage correlation matrix whose eigenvalues are largest. procedure and subdivides the data into groups Intuitively, the procedure followed here is that are economically or statistically highly akin to an unobserved variable problem. It is correlated or both was adopted. A principal assumed that there is some unobserved vari- components analysis on these subgroups can able called T (technology), and that this be used to create a subindex for those vari- variable is correlated with a number of other ables, which can then be used in a second variables (X), such as R&D expenditures, stage to calculate an overall summary index. share of high-tech goods in total manufactur- Two methodologies for determining the ing, and so on. These correlated variables are subgroups were employed. The first was based grouped together into a single data set and the on an ex ante grouping of the indicators fol- eigenvalues of its correlation matrix are exam- lowing an economic rationale, and the second ined to identify a limited number of linear consisted of an ex post grouping of indicators combinations (principal components) of the based on an analysis of the correlation matrix 94 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S and a graphical analysis of component loadings 0 and 1 by subtracting from each variable the to identify groups of indicators that are highly minimum observed value in the sample correlated with each other. Because the overall (across countries and time periods) and divid- technological achievement indexes obtained by ing by the difference between the maximum these two methodologies are very similar, with value in the sample and the minimum value.26 correlation coefficients of 0.99, the remainder Hence the value for indicator j for country i of the discussion is limited to the results ob- and time t is given by tained from the ex ante grouping given its more xijt ϭ (Xijt Ϫ Min Xj ) (Max Xj Ϫ Min Xj) straightforward economic interpretation. Data preparation Applying principal components To maximize the economic comparability of analysis to technology the underlying cross-county data, all data For the purposes of this study, 34 variables were were scaled, that is, expressed as a percentage identified that bore an ex ante relationship with of population, a percentage of GDP, a technology and for which adequate country percentage of exports or imports, or a per- coverage existed over the 1990–2006 period to centage of arable land, as relevant. So support the calculation of two indexes, one for researchers could minimize the influence of the early 1990s and the second for the early outliers and one-off events, the scaled data 2000s. The variables related to technological were averaged over two time periods for each achievement and their sources are reported in country: 1990–93 and 2000–03.25 All data table A2.1 and those related to technological were converted into an index bound between absorptive capacity are reported in table A2.2. Table A2.1 Indicators used to calculate the summary indexes and overall index related to technological achievement Scientific innovation and invention Scientific and technical journal articles by population World Development Indicators Patents granted by the United States Patent and Trademark Office by population Lederman and Saenz 2005 Patents granted by the European Patent Office by population Lederman and Saenz 2005 Penetration of older technologies Electrical Power Consumption kilowatt-hours/capita World Development Indicators International outgoing telephone traffic percent of GDP per 1,000 people World Development Indicators Main lines per 100 inhabitants World Development Indicators Air transport, registered carrier departures worldwide percent of GDP per 1,000 people World Development Indicators Agricultural machinery: tractors per 100 hectares of arable land World Development Indicators Exports of manufactures percent of merchandise exports World Development Indicators Medium-tech exports percent of total exports CEPII BACI database Penetration of recent technologies Internet users per 1,000 people World Development Indicators Personal computers per 1,000 people World Development Indicators Cellular subscribers per 100 inhabitants World Development Indicators Percentage of digital mainlines World Development Indicators High-tech exports percent of total exports CEPII BACI database Exposure to external technology FDI net inflows percentage of GDP World Development Indicators Royalties and license fee payments percent of GDP World Development Indicators Imports of high-tech goods percent of GDP CEPII BACI database Imports of capital goods percent of GDP CEPII BACI database Imports of intermediary goods percent of GDP CEPII BACI database Source: World Bank. Note: BACI ϭ Banque analytique de commerce internationale, CEPII ϭ Centre d’Etudes Prospectives et d’Informations Interna- tionales, EPO ϭ European Patent Office, FDI ϭ foreign direct investment, GDP ϭ gross domestic product, USPTO ϭ United States Patent and Trademark Office. 95 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table A2.2 Indicators used to calculate the summary indexes and overall index of technological absorptive capacity Macroeconomic environment General government balance as percentage of GDP IMF/WEO and World Bank Annual CPI inflation rate Thomson Datastream and World Bank Real exchange rate volatilty J.P. Morgan, IMF and World Bank Financial structure and intermediation Liquid liabilities percent of GDP Beck, Demirgüç-Kunt, and Levine 2000 Private credit percent of GDP Beck, Demirgüç-Kunt, and Levine 2000 Financial system deposits percent of GDP Beck, Demirgüç-Kunt, and Levine 2000 Human capital Primary educational attainment percent of population aged 15 and over Barro and Lee 2000 Secondary educational attainment percent of population aged 15 and over Barro and Lee 2000 Tertiary educational attainment percent of population aged 15 and over Barro and Lee 2000 Governance Voice and accountability Kaufmann, Kraay, and Mastruzzi 2007 Political stability Kaufmann, Kraay, and Mastruzzi 2007 Government effectiveness Kaufmann, Kraay, and Mastruzzi 2007 Regulatory quality Kaufmann, Kraay, and Mastruzzi 2007 Rule of law Kaufmann, Kraay, and Mastruzzi 2007 Control of corruption Kaufmann, Kraay, and Mastruzzi 2007 Source: World Bank. An initial analysis of the two data sets ponents analysis to this data. The Chi-square revealed the existence of two principal statistics are 1,520.88 (p-value of 0.00) and components that explained 10 percent or more 1,572.10 (p-value of 0.00), respectively. Those of the overall variance and three eigenvalues statistics indicate a strong rejection of the null that exceeded 1—a widely used rule of thumb hypothesis that variables are not correlated. for determining the underlying dimensionality Subsequently, as outlined earlier, principal of a data set—in each of the data sets being components analysis was performed on ex ante used (tables A2.3 and A2.4). Bartlett’s test for economically motivated subgroups of the data sphericity confirms that the basic indicators are for each summary index. In most cases, the first correlated for both indexes, which confirms principal component from these subgroupings the meaningfulness of applying principal com- explained more than 60 percent of the total Table A2.3 Share of total variance explained Table A2.4 Share of total variance explained by principal components, technological by principal components, technological achievement index absorptive capacity index Technological achievement index (2000–03) Technological absorptive capacity index (2000–03) Cumulative Cumulative Share of share of Share of share of Component Eigenvalues variance explained variance explained Component Eigenvalues variance explained variance explained 1 9.91 0.52 0.52 1 8.76 0.58 0.58 2 3.59 0.19 0.71 2 1.95 0.13 0.71 3 1.49 0.08 0.79 3 1.27 0.09 0.80 4 0.92 0.05 0.84 4 0.89 0.06 0.86 5 0.85 0.04 0.88 5 0.66 0.04 0.90 Ӈ Ӈ Ӈ Ӈ Ӈ Ӈ Ӈ Ӈ 19 0.00 0.00 1.00 15 0.01 0.00 1.00 Bartlett’s test: Chi-sq (171) 1520.88 (p-value 0.00) Bartlett’s test: Chi-sq (105) 1572.09 (p-value 0.00) Source: World Bank. Source: World Bank. 96 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S variance for the subgroup,27 suggesting that it Indicators of the penetration of old tech- adequately summarized the information in the nologies constitute a notable exception. When overall grouping (table A2.5). Bartlett’s test all seven indicators were included, two eigen- for sphericity rejects the null hypothesis of no values exceeded unity. In addition, while the correlation between variables in all cases at the first principal component explained 55 percent 1 percent level. of the variance, the second component Table A2.5 Share of total variance explained by principal components for each sub-group of indicators Technological achievement index (2000–03) Cumulative Cumulative Share of share of Share of share of Component Eigenvalues variance explained variance explained Component Eigenvalues variance explained variance explained Scientific invention and innovation Penetration of old innovations 1 1.49 0.75 0.75 1 1.46 0.73 0.73 2 0.51 0.25 1.00 2 0.54 0.27 1.00 Bartlett’s test: Chi-sq (1) 126.58 (p-value 0.00) Bartlett’s test: Chi-sq (1) 26.32 (p-value 0.00) Penetration of recent innovations Exposure to external technology 1 3.28 0.66 0.66 1 3.43 0.69 0.69 2 0.92 0.18 0.84 2 0.80 0.16 0.85 3 0.57 0.11 0.95 3 0.54 0.11 0.96 4 0.19 0.04 0.99 4 0.22 0.04 1.00 5 0.05 0.01 1.00 5 0.01 0.00 1.00 Bartlett’s test: Chi-sq (10) 605.16 (p-value 0.00) Bartlett’s test: Chi-sq (10) 250.32 (p-value 0.00) Technological absorptive capacity index (2000–03) Cumulative Cumulative Share of share of Share of share of Component Eigenvalues variance explained variance explained Component Eigenvalues variance explained variance explained Human capital Macroeconomic environment 1 1.87 0.62 0.62 1 2.36 0.79 0.79 2 0.77 0.26 0.88 2 0.55 0.18 0.97 3 0.37 0.12 1.00 3 0.09 0.03 1.00 Bartlett’s test: Chi-sq (3) 47.16 (p-value 0.00) Bartlett’s test: Chi-sq (3) 25.53 (p-value 0.00) Governance Financial structure and intermediation 1 5.30 0.88 0.88 1 2.69 0.90 0.90 2 0.33 0.05 0.93 2 0.30 0.09 0.99 3 0.23 0.04 0.97 3 0.02 0.01 1.00 4 0.09 0.02 0.99 Bartlett’s test: Chi-sq (3) 633.96 (p-value 0.00) 5 0.03 0.01 1.00 6 0.02 0.00 1.00 Bartlett’s test: Chi-sq (15) 2077.61 (p-value 0.00) Source: World Bank. 97 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 accounted for a non-negligible 22 percent of index (rather than combined into one the variance. The group was therefore further subindex).29 divided into two subgroups: industrialization As expected, the principal components and penetration of other old innovations. For analysis assigned each subindex unequal each subgroup only the first principal compo- weights in the overall index. Table A2.6 sum- nent presented an eigenvalue greater than 1 marizes the weights assigned to each indica- and accounted for more than 70 percent of the tor series in the summary subindex of variance in both instances. Subsequently, an- technological achievement for each of the other stage of principal component analysis economic variables. Table A2.7 reports the was performed to calculate an aggregate same data for the components used to calcu- subindex for the penetration of old innova- late the overall index of technological tions, and the results are presented in the table absorptive capacity. A2.9 on the following page.28 The overall con- In a second stage, we conducted a princi- clusions obtained do not change substantially pal components analysis on the subindexes. when the two groups are entered separately In the case of the technological achievement into the overall technological achievement and the technological absorptive capacity indexes, the first principal component explained 79 percent and 65 percent, respectively, of the overall variance (table A2.8), suggesting that Table A2.6 Factor loadings and variable the first eigenvector of the correlation matrix weights for technological achievement provided a satisfactory summary of the infor- subgroups (2000–03) mation included in each of the subindexes. Factor Variable loadings weights (%) Scientific innovation and development Table A2.7 Factor loadings and variable Patents 0.7071 68.42 weights for technological absorptive Scientific and technical articles 0.7071 31.58 capacity subgroups (2000–03) Penetration of old innovations Factor Variable Industrialization 0.7071 67.43 loadings weights (%) Main telephone lines per 100 inhabitants 0.5815 30.82 Human capital Exports of manufactures 0.5597 42.67 Primary educational attainment 0.4648 24.92 Exports of medium-tech goods 0.5904 26.51 Secondary educational attainment 0.6153 39.27 Other old innovations 0.7071 32.57 Tertiary educational attainment 0.6367 35.82 Electric power 0.4067 32.66 Governance International telephone traffic 0.5137 21.00 Air transport 0.5396 20.06 Voice and accountability 0.3918 19.14 Agricultural machinery 0.5288 26.28 Political stability 0.3760 15.42 Government effectiveness 0.4224 17.98 Penetration of recent innovations Regulatory quality 0.4140 11.85 Internet users 0.5282 25.45 Rule of law 0.4250 18.39 Personal computers 0.5214 24.52 Control of corruption 0.4179 17.22 Cellular subscribers 0.5060 28.25 Macroeconomic stability Percentage of digital mainlines 0.1846 6.39 Exports of high-tech goods 0.3987 15.40 General government balance 0.4990 28.95 Annual consumer price index Exposure to external technology inflation rate 0.6100 34.40 Net FDI inflows 0.4969 28.55 Real exchange rate volatility 0.6156 36.66 Royalties and license fee payments 0.4384 16.35 Financial structure and intermediation Imports of high-tech goods 0.4624 17.59 Imports of capital goods 0.4914 28.20 Liquid liabilities 0.5910 30.79 Imports of intermediary goods 0.3248 9.30 Private credit 0.5424 38.58 Financial system deposits 0.5971 30.63 Source: World Bank. Note: FDI ϭ foreign direct investment. Source: World Bank. 98 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S Table A2.8 Share of total variance Table A2.9 reports the implicit weights at- explained by main principal components tached to each subindex in the two summary of technological achievement and indexes. technological absorptive capacity using A similar process was undertaken, with the sub-indexes (2000–03) similar results, for the data from the 1990s. In Share of Cumulative share of calculating the percentage changes in each Component Eigenvalues variance explained variance explained subindex and in the overall index, the factor Technological achievement loadings from the 2000s estimation procedure 1 3.17 0.79 0.79 2 0.60 0.15 0.94 were used to ensure comparability of the data 3 0.14 0.04 0.98 sets. 4 0.09 0.02 1.00 Bartlett’s test: Chi-sq (6) 332.49 (p-value 0.00) Technological absorptive capacity 1 2.61 0.65 0.65 2 0.80 0.20 0.85 3 0.32 0.08 0.93 4 0.27 0.07 1.00 Bartlett’s test: Chi-sq (6) 138.31 (p-value 0.00) Source: World Bank. Table A2.9 Factor loadings and variable weights obtained from second-stage principal components analysis (2000–03) Scientific innovation Penetration of old Penetration of Exposure to and invention innovations recent innovations external technology Technological achievement Factor loadings 0.5272 0.5404 0.4409 0.4855 Subindex weights (%) 21.74 23.99 34.79 19.48 Financial structure Human capital Governance Macroeconomic environment and intermediation Technological absorptive capacity Factor loadings 0.5392 0.5579 0.3493 0.5254 Subindex weights (%) 25.29 36.98 10.66 27.06 Source: World Bank. Notes goods produced by unskilled and semiskilled labor, and 1. TFP simply measures all influences on GDP the influx of low-skilled immigrants, are also cited as growth other than increases in capital and labor. Thus contributing to earnings inequality in high-income changes in TFP could reflect changes in the composi- countries. tion of output (for example, a shift from agriculture to 4. This is an important conclusion of Global Eco- manufacturing), changes in the quality of labor or cap- nomic Prospects 2007. Although intercountry inequal- ital not reflected in the data (for example, education ity (where each country is accorded equal weight) has levels), or any other variable that is an important de- worsened, weighting country observations by popula- terminant of growth but whose influence is not explic- tion shows an improvement in income distribution. itly accounted for in growth equations. Taking into account within-country inequality, global 2. See http://www.itto.or.jp/live/PageDisplay inequality has remained roughly constant since the late Handler?pageId=217&id=280. 1980s. 3. See, for example, Haskel and Slaughter (2002) 5. Anecdotal evidence indicates that access to and Krugman (2000). The rise in the global supply of mobile phones improved returns to producers at the 99 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 expense of middlemen for fishermen in Porto da less the score in the interior. Thus the Russian Federa- Manga, Brazil, and Moree, Ghana, and for farmers in a tion’s weak overall score in comparison with China’s wholesale market in Sri Lanka (de Silva and Zainudeen may be explained by the relative absence of large port 2007). The advent of the Internet and automated teller cities close to major Russian manufacturing centers, machines had a similar effect in the United States, over- whereas in China, port cities and manufacturing cen- coming the anticompetitive effects of state banking reg- ters tend to be in close proximity. ulation and strong lobbying in state legislatures. 15. Principal components analysis involves exam- 6. The focus on patents and scientific publications re- ining the eigenvectors of the correlation matrix of a flects academic research on technology. Patents have the set of related data and extracting from it a weighting advantage of being more clearly associated with scheme that describes as much of the information con- processes rather than products (by definition, a patent is tained within the data set as possible using a mini- not granted on a product, but rather on the method by mum number of orthogonal linear combinations of which it is produced). The disadvantage is that patents the original data. By construction, a data set that con- exclude a number of important forms of innovation, no- sists of 100 series will have 100 of these eigenvectors tably software (until recently) and processes for manag- that fully describe all the information in the data set. ing multinational production and distribution networks. However, the first five of these eigenvectors (five dif- 7. The definition of a high-tech export used here ferent linear combinations of the initial 100 series) includes products with high R&D intensity, such as may describe 90 percent of the total variance. In such aerospace-related items, computers, pharmaceuticals, a case, principal components analysis would involve scientific instruments, and electrical machinery. As calculating an overall index based on these five such, it excludes a number of services such as software subindexes. In a two- or three-stage procedure such as engineering that may, by their nature, be even more the one used here, the data are divided into subgroups technologically intensive. either based on the ex ante characteristics of the 8. For example, the correlation coefficient of the subindexes or on the basis of statistical correlations. share of high-tech exports in total foreign sales with Then a separate principal components analysis is done adult literacy was 43 percent in 2005 and with on each of these subindexes, which are subsequently expected years of schooling was 22 percent. combined in a second or third round to determine the 9. Regional and income group data in table 2.7 are overall index. weighted averages of individual countries, with the 16. To minimize the influences of outliers, the com- weights given by their populations. The simple ponent indicators of the subindexes for each time pe- averages cited in the text give equal weight to every riod are calculated as the four-year average of values country independent of the size of its population. for the period 1990–93 and 2000–03. To maximize 10. The core technology for the Internet can trace country coverage, missing data are gap-filled by using its history back to the early 1960s and a network more recent or older data generally from within the developed by the U.S. Defense Department’s Advanced analytical period. For the transition economies of the Research Projects Agency. However, the Internet as it is former Soviet bloc, data as recent as 1995 are used for understood by most people today—the World Wide the early 1990s data point in cases where data do not Web and HTML web pages—was first introduced in exist or are unreliable. the early 1990s, with the first web browser, Mosaic, 17. The relationship between income and techno- being released in 1993. logical achievement is complex. The level of income af- 11. According to the Cellular Operators Associa- fects the ability to gain access to technology, while the tion of India, the country had more than 121 million level of technology helps to determine income levels subscribers in March 2007. (see the earlier section on “The role of technology in 12. For example, South Africa is beginning to at- development”). tract companies for business process outsourcing. One 18. Low-income countries included in the first British executive (Ranger 2006) noted that his index are Bangladesh, Benin, Côte d’Ivoire, Ethiopia, U.K. customers were more comfortable with the South Ghana, India, Kenya, the Kyrgyz Republic, Mozam- African accent than with the Indian accent and cited bique, Nepal, Nigeria, Pakistan, Senegal, Sudan, the advantages of working at similar times as the par- Tanzania, Togo, Vietnam, the Republic of ent company. Yemen, Zambia, and Zimbabwe. The second index 13. A 2005 report from Gartner Inc. stated that includes all of these except Nepal, Vietnam, the India had captured 80 to 90 percent of total offshore Republic of Yemen, and Zimbabwe. outsourcing revenue (Tucci 2005). 19. The penetration of new technologies during 14. The scores in large countries may be biased, 1990–2000 increased by 102 percent in high-income better reflecting the scores in coastal trading cities and OECD countries, 256 percent in upper-middle-income 100 T E C H N O L O G Y A N D T E C H N O L O G I C A L D I F F U S I O N I N D E V E L O P I N G C O U N T R I E S countries, 219 percent in lower-middle-income coun- tries, and 123 percent in low-income countries. References Acemoglu, Daron. 2002. “Technical Change, Inequality, 20. 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For exam- Archibugi, Daniele, and Alberto Coco. 2005. “Mea- ple, the diffusion of electricity is measured by kilowatt suring Technological Capabilities at the Country hours consumed per person and the diffusion of rail- Level: A Survey and a Menu for Choice.” roads is measured by tonnage moved divided by gross Research Policy 34: 175–94. national product. Arvis, Jean-François, Monica Alina Mustra, John 22. Of the 699 country-technology pairs related to Panzer, Lauri Ojala, and Tapia Naula. 2007. Con- developing countries, 216 refer to a technology that necting to Compete: Trade Logistics in the Global was first recorded in the 19th century, 318 date from Economy. Washington, DC: World Bank. the first half of the 20th century, 98 come from the Bailey, Martha J. 2006. “More Power to the Pill: The third quarter of the 20th century, and 67 from the final Impact of Contraceptive Freedom on Women’s quarter of the 20th century. Labor Supply.” Quarterly Journal of Economics 23. The data set includes an estimate of the date of 121 (1): 289–320. discovery for each technology. Bankable Frontier Associates. 2007. “Financial Service 24. That is, there are country-technology pairs, not Access and Usage in Southern and East Africa: considered in this analysis, that have reached the 5 per- What Do FINSCOPE™ Surveys Tell Us?” cent level but are taking a long time to reach the Bankable Frontier Associates. http://www. 25 percent level. bankablefrontier.com. Accessed October 2007. 25. When missing data issues occurred over this Behrman, Jere, and Mark Rosenzweig. 2004. “Returns time period, the earliest available observation for a to Birthweight.” Review of Economics and Statis- given indicator in the period from 1988–96 and tics 86 (2): 586–601. 1998–2006 was used so as to expand country cover- Besant-Jones, John. 2006. “Reforming Power Markets in age. The budget balance indicators and the real ex- Developing Countries: What Have We Learned?” change rate volatility indicators were averaged over the Energy and Mining Sector Board Discussion Paper periods 1990–96 and 2000–06 to purge out cyclical 19. World Bank, Washington, DC. effects. The real exchange rate volatility series is the Briceno-Garmendia, Cecilia, Antonio Estache, and yearly average of the absolute value of monthly change Nemat Shafik. 2004. “Infrastructure Services in in the real effective exchange rate. Developing Countries: Access, Quality, Costs and 26. For this operation the authors used a combined Policy Reform.” Staff Working Paper 3468. data set including observations from both the 1990s World Bank, Washington, DC. and 2000s to ensure that data for each period had the Chandra, Vandana. ed. 2006. Technology, Adaptation same underlying scaling. and Exports: How Some Developing Countries 27. Frequently more than 70 percent of the vari- Got It Right. Washington, DC: World Bank. ance was explained by the first principal component. Chandra, Vandana, and Shashi Kolavalli. 2006. 28. A data-driven grouping of indicators was also “Technology, Adaptation and Exports: How conducted and used to generate a two-step index simi- Some Developing Countries Got It Right.” In lar to the one reported in the main text. As the indexes Technology, Adaptation and Exports: How Some derived from this procedure did not differ materially Developing Countries Got It Right, ed. Vandana from the one reported here, they are not reported. Chandra, 1–48. Washington, DC: World Bank. 29. Furthermore, results for the overall technologi- Chinn, Menzie D., and Hiro Ito. 2006. “What Matters cal achievement index remain unchanged when the en- for Financial Development? Capital Controls, tire old innovations indicator group is included, that is, Institutions and Interactions.” Journal of Devel- when no division into subgroups is made and the opment Economics 81 (1): 163–92. second principal component is ignored. 101 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Comin, Diego, and Bart Hobijn. 2004. “Cross- Kaufmann, Daniel, Frannie Leautier, and Massimo Country Technology Adoption: Making the Mastruzzi. 2005. “Governance and the City: Theories Face the Facts.” Journal of Monetary An Empirical Exploration into Global Deter- Economics 51 (1): 39–83. minants of Urban Performance.” Policy de Silva, Harsha, and Ayesha Zainudeen. 2007. Research Working Paper 3712. World Bank, “Teleuse on a Shoestring: Poverty Reduction Washington, DC. through Telecom Cccess at the ‘Bottom of the Kearney, A. T. 2007. “Labor Cost Advantages of Pyramid’.” Paper prepared for the Centre for ‘Offshore’ Locations Decline in 2006.” A. T. 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Accessed September 28. 2005. Washington, DC: World Bank. UNIDO (United Nations Industrial Development Or- Zhu, Susan Chun, and Daniel Trefler. 2005. “Trade ganization). 2002. Industrial Development Re- and Inequality in Developing Countries: A Gen- port 2002/2003: Competing through Innovation eral Equilibrium Analysis.” Journal of Interna- and Learning. Vienna: UNIDO. tional Economics. 65: 21–48. 103 3 Determinants of Technological Progress: Recent Trends and Prospects As discussed in the previous chapter, the pace at least cost. However, no matter how com- at which technologies spread between and pellingly useful a technology may be, the within countries has picked up. As a result, process by which it spreads within a country most developing countries are narrowing the can be lengthy. technological divide that separates them from The speed with which a country absorbs high-income countries. Nevertheless, the tech- and adopts technology depends on many fac- nology gap remains large; for many, including tors, including the extent to which a country several low-income countries, it is widening has a technologically literate workforce and a rather than closing, in part because of the highly skilled elite; promotes an investment slowness with which technologies spread climate that encourages investment and per- within countries. For virtually all developing mits the creation and expansion of firms countries, the domestic pace of technological using higher-technology processes; permits progress is determined mainly by the speed access to capital; and has adequate public sec- with which already existing technologies are tor institutions to promote the diffusion of adopted, adapted, and successfully applied critical technologies where private demand or domestically, and done so throughout the market forces are inadequate. economy, not just in the main cities. The process of technology absorption is also This chapter explores some of the major subject to virtuous circles. Scale economies determinants of this kind of within-country in technologically sophisticated sectors and in diffusion of technology. It adopts an analyti- learning by doing tend to make the acquisition cal framework that distinguishes between the of technology a nonlinear process, character- factors that dictate the extent to which an ized initially by slow penetration until some economy is exposed to external technologies threshold is reached, followed by a period of on the one hand and the efficiency with which rapid acceleration, and finally by a period of it absorbs them on the other hand. Among the slower diffusion as saturation is achieved. As most important channels through which low- a consequence, while gaps in technological and middle-income countries are exposed to achievement create opportunities for acceler- foreign technologies are trade; foreign direct ated growth and convergence in lagging investment (FDI); and contacts with highly economies, they can also lead to divergence if skilled diaspora members (nationals working the conditions for technology adoption in abroad) and with other information net- lagging countries are insufficient. Many tech- works, including those of academia and the nologies operate synergistically to reinforce media. Maintaining an open environment to the demand for each other and the effective- such flows is critical for accessing technology ness and capacity of supply. 105 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Although the process of technological dif- from less than 50 percent in 1990 to fusion has a clear logic, the process is by no more than 62 percent, and among youth means mechanical. It occurs through interac- they now exceed 74 percent. In addition, tions among individuals, entrepreneurs, firms, the macroeconomic, governance, and in- and governments. The role of government is vestment climate that innovative firms both direct, as a supplier of many technologi- and entrepreneurs need to operate is im- cal services, and indirect. In particular, the proving. More countries are operating efficiency with which firms can diffuse tech- in a context of close to stable prices (me- nology within the domestic economy depends dian inflation in low-income countries on the overall political and economic context, declined from 9.2 to 4.2 percent be- the level and distribution of human capital, tween 1990 and 2006) and flexible ex- the quality of the macroeconomic environ- change rate regimes, while government ment, and the rules and regulations governing finances are better balanced. the conduct of business, all of which are heav- Technological diffusion among ily influenced by governments. middle-income countries has benefited This chapter discusses the principal chan- from the reorientation of global produc- nels through which developing countries are tion processes. Advances in communica- exposed to advanced technology, analyzes the tions and transport technology have main determinants of domestic absorptive given rise to the growth of global pro- capacity, and indicates likely future trends in duction networks, facilitating increased technological diffusion. The following six trade and technological advances in main messages emerge from this analysis. many developing countries, particularly The principal channels by which middle-income developing countries. developing countries are exposed to Until recently, low wages and a solid, if external technology—which include low, level of basic technological literacy trade, FDI, and a highly skilled dias- have been sufficient to capture a signifi- pora—have increased substantially over cant role in global networks in many the past several decades. The share of countries. As wages rise, however, these imported high-tech products in gross countries will need to make substantial domestic product (GDP) has risen by additional investments in human capital more than half in both low- and middle- to maintain their share of global produc- income regions since the mid-1990s, tion and continue the technological con- that of imports of capital goods by 37 vergence of the past few years. They will percent, that of imports of intermediate also need to adopt a more proactive ap- goods by 26 percent, and that of FDI in- proach to developing local competencies flows by sixfold since the 1980s. Finally, and to using research and development the size and sophistication of global di- (R&D) and outreach programs to bol- asporas has increased markedly, along ster the diffusion process. with substantial improvements in the For low-income countries, poor tech- technology by which migrants can trans- nological adaptive capacity and limited mit their know-how and interact with dissemination of often simple technolo- their home economies. gies to the countryside are severely con- The ability to absorb foreign technol- straining technological progress. Despite ogy, which depends on domestic policies progress in basic technological literacy, and institutions, has also improved in extremely low levels of income, weak many developing countries. Reflecting governance structures, and, in some rising school enrollment, literacy rates in cases, ongoing conflict continue to low-income countries have increased stymie the ability of low-income, and 106 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S especially Sub-Saharan African, coun- affect countries’ ability to absorb technology tries to obtain and absorb new tech- from abroad. The chapter concludes with a nologies. Nevertheless, the potential for speculative view of the prospects for technolog- technological progress through the ical progress and some policy messages. greater dissemination of relatively sim- ple technologies is huge. The absence or low quality of some Drivers of technological basic technologies that governments his- progress: A framework torically provide hinders technological diffusion by the private sector. These basic technologies often represent essen- T he process by which countries adopt, adapt, and absorb external technologies is complicated. The overall framework followed tial complementary technologies whose in this chapter (depicted in figure 3.1) draws on absence can prevent the successful adop- previous work done at the World Bank, in par- tion of a new-to-the-market technology. ticular, the 1998 World Development Report The relatively rapid dissemination on the knowledge economy (World Bank 1998) of new communications technologies and several regional and country-specific policy throughout the developing world, in- analyses of technology and technological com- cluding in low-income countries, offers petencies. In addition, it relies upon the acade- a ray of hope. These potentially trans- mic literature on technology diffusion, includ- formational technologies are enabling, ing an excellent review article by Keller (2004); often for the first time, the kinds of several articles by Coe and Helpman concern- arm’s-length transactions that may be ing the role of FDI; case studies of the process critical to firm development and the of technology diffusion by Chandra and spread of technology in these countries. Kolavalli (2006); empirical work on the tech- New technologies are frequently intro- nological influence of imports by Lumenga- duced and promoted by members of Neso, Olarreaga, and Schiff (2005); and the national diasporas, both directly through discussion by Rodrik (2004) on the impact of networks and indirectly through invest- market failures on innovation incentives. ments financed from remittances. The rest of this chapter is devoted to Exposure to external flows interacts exploring how developing countries absorb with domestic capacity to diffuse external technology. The next section presents technology an analytical framework for technological For the purposes of analytical simplicity, the progress. This is followed by a discussion of framework presents technological progress how trade, FDI, and migration expose coun- in developing countries as a process whereby tries to new technologies and can promote in- an economy is exposed to higher-technology ternal diffusion of those technologies. The sec- business processes, products, and services tion also discusses trends in these flows and through foreign trade; FDI; and contacts with the potential magnitude of associated techno- its diaspora and other communication chan- logical progress and how this may have nels, including academic and international or- changed over time. The chapter then turns to ganizations (the large arrows at the top of the an analysis of the domestic factors that facili- figure). Exposure to new ideas and techniques tate the absorption of new technologies. This is, however, not sufficient to ensure techno- section first examines how government poli- logical progress on the ground. The extent to cies, and the business environment in general, which these flows are translated into techno- facilitate the creation and expansion of innova- logical progress depends on the technical ab- tive firms. It then looks at how levels of human sorptive capacity of the economy (represented capital—from literacy rates to R&D capacity— by the ringed drum). This in turn depends on 107 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 3.1 Domestic absorptive capacity both conditions and attracts external flows Technological frontier Transmission Diaspora channels Trade FDI and other networks Technological absorptive Governance and the business climate Policies to - create competencies capacity - build infrastructure Basic technological literacy - foster an innovation- friendly business climate Finance of innovative firms Pro-active policies Technological absorption Spillover Returns to Dynamic effects scale effects magnify technology transfer Domestic technological achievement Source: World Bank. the extent to which the business and macro- which need to serve as a two-way conduit, economic climate fosters an environment in both informing the population about techno- which firms—the main mechanism for tech- logical solutions and providing feedback to nological diffusion within a country—are able providers concerning the usability of and de- to form, grow, and expand. Absorptive capac- mand for proposed solutions. Taken together, ity also depends on the levels of basic techno- these factors act as filters (the rings in the logical literacy and advanced skills found in drum) that dictate how much of the potential the country, which together dictate the coun- technological flow is actually absorbed try’s capacity to implement technologies on domestically. the one hand and to do the research necessary The overall process is, of course, more to understand, implement, and adjust im- complicated, with both technological flows ported technologies on the other hand. Also and technological adaptive capacity influenc- important are government actions designed to ing each other. For example, international help overcome market failures that might trade is perhaps the most important vector for limit the financing of innovative activity, plus the transmission of technology, but the extent actions that focus technology policy on adapt- of a country’s openness to trade depends sig- ing and adopting those existing technologies nificantly on the amount of FDI that has oc- for which there is a market and for which ad- curred, the existence of a vibrant and techno- equate domestic competencies exist. Critical logically literate diaspora, and the domestic here are outreach and dissemination policies, business climate. Similarly, the quantity of FDI 108 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S and its overall effectiveness depends on the adequate savings to invest in a new technol- quality and technological literacy of the labor ogy, or may lack the collateral required to bor- force. row. Thus poverty is a major cause, as well as a result, of low levels of technology. Increasing returns and spillover effects Affordability is also an issue at the macro can magnify these effects. . . level. Low incomes constrain government fi- Both domestic and external determinants of nance, limiting the government’s capacity to technological transfer are affected to varying put into place both the level of physical infra- degrees by increasing returns to scale and structure and the investments necessary to spillover effects that can magnify the absorp- develop a level of domestic human capital tive impact of these flows. Access to foreign capable of supporting and exploiting even markets may allow domestic firms to grow and simple technologies. exploit economies of scale associated with some technologies, raising the overall wealth Policy should not impede innovative and technological sophistication of an econ- firms omy. Meanwhile, the technological spillovers Finally, firms, entrepreneurship, and govern- that can be expected from FDI, including ment action that actively supports the diffu- demonstration effects and the transfer of busi- sion of economically relevant and profitable ness process and human capital to domestic technologies are the grassroots mechanisms by firms through employee turnover, are likely to which technologies diffuse within countries. be greater the more qualified is the labor force. Firms must be able, and entrepreneurs permit- Both FDI and trade can contribute to cluster ted, to profit from the exploitation of new-to- effects and networking externalities that in- the-market-technologies if those technologies crease the potential for spillovers and to tech- and products are to diffuse. This means that nological diffusion from individual sectors and policy must be welcoming of such profits and firms to the rest of the economy. Alternatively, that both R&D and dissemination efforts not economies of scale and agglomeration effects only need to focus on creating or adapting may prevent entry by new firms in some mar- products and ideas (domestic or foreign) to kets, cutting off otherwise promising opportu- the local market, but also must give priority to nities for technological learning. In addition, assisting firms to exploit them. imitators may limit entrepreneurs’ ability to capture the returns to new-to-the-market External transmission channels innovations, thereby reducing incentives for technological progress. T his section presents data and describes re- cent trends concerning the external chan- nels through which developing countries are . . . but a lack of financing can stymie exposed to foreign technologies. Where rele- innovation vant, it also draws on the literature to com- Affordability issues can influence both the size ment on how specific elements in a country’s of initial inflows and a country’s technological technological absorptive capacity (discussed in absorptive capacity. Even if profitable invest- more detail later in this chapter) interact with ments in technology are available and the do- these external flows to determine the extent to mestic environment encourages the absorption which these channels translate into technolog- of new technologies, low incomes may make ical achievement. new technologies unaffordable to individuals and firms in developing countries. At the ex- Trade treme, individuals near subsistence levels may Trade is one of the most important mechanisms be unwilling to risk adopting a new-to-the- by which embodied technological knowledge market technique, may be unable to generate (in the form of both capital and intermediate 109 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 goods and services) is transferred across coun- goods in their manufactured exports is higher tries. Imports of technologically sophisticated than these goods’ share in manufacturing goods help developing countries raise the qual- value added, reflecting the dependence of ity of their own products and the efficiency their high-tech exports on imports of techno- with which they are produced. Countries can logically sophisticated components and the also absorb new technology by exporting to relatively low technological complexity of customers who implicitly or explicitly provide domestic manufacturing operations. By con- guidance in meeting the specifications required trast, “active FDI-dependent” countries, such for access to global markets. For developing as Chile and Hungary, strike a better balance countries with low R&D intensity, trade open- between the share of high-tech goods and ser- ness and exposure to foreign competition vices in overall exports and domestic value provide powerful inducements to adopt more added, reflecting greater domestic technologi- advanced technology in both exporting and cal competencies. For the Russian Federation import-competing firms and are likely to pro- and some of the other countries that belonged duce large technology spillovers and produc- to the former Soviet Union, a strong techno- tivity gains (Schiff and Wang 2006a). logical base and relatively low import shares However, the extent to which exposure to of high-tech goods reflect their more advanced foreign technologies is reflected in the export learning style, which places greater emphasis and import patterns of individual countries on domestically developed technologies. depends on, among other things, the absorp- Nevertheless, these technologies mainly feed tive capacity of individual countries. As Soub- into products that serve the local market, botina (2006) discusses, countries with rela- because both high costs and quality concerns tively weak domestic scientific capacities tend keep these sectors from being internationally to follow a more passive approach to technol- competitive. ogy absorption that is characterized by limited efforts to leverage the technology imported by The potential for technology transfer foreign firms operating on their soil. For these through imports has risen countries, most technology transfers take Imports improve domestic technology because place either through imports of high-tech embodied technology both allows firms to em- goods, or perhaps through an apparently ploy more efficient production processes and high-tech export sector that is, in reality, dom- affords the possibility that firms can copy inated by assembly operations associated with more advanced products and processes. At the elevated imports of high-tech goods. Where same time, competition from technologically sophisticated domestic capacities coexist with superior imports may boost domestic produc- a significant degree of basic technological lit- tivity.1 Developing countries that have a large eracy in the population, technology diffusion share of imports from high-income countries is enhanced and, in general, the technological with large R&D expenditures have signifi- content of exports is higher. cantly higher productivity than developing Following Soubbotina (2006) classifica- countries that import from advanced coun- tions, “traditionalist slow learners,” such as tries with lower R&D expenditures (Coe, Bangladesh and Burkina Faso, which have low Helpman, and Hoffmaister 1997).2 There also levels of technological competency and tech- is evidence for a positive relationship between nological literacy, tend to rely to a large extent access to imported intermediate goods and on imports of machinery and equipment. performance (Handoussa, Nishimizu, and Other countries, such as Malaysia, Mexico, Page 1986). More recent literature highlights and the Philippines, appear to follow a “pas- the indirect benefits for developing countries sive FDI-dependent” learning style. For these from North–North trade in R&D. The ex- countries, the share of high- and medium-tech change of high-tech goods and services among 110 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S high-income economies contributes to an in- Developing countries’ high-tech imports crease in the global stock of knowledge and have increased eventually becomes available to developing To the extent that a developing country can countries through North–South trade. Finally, make use of or imitate sophisticated goods, its technology diffusion, like trade, tends to be re- level of technological achievement should in- gional, with the largest transfers coming from crease in line with the quality and technological natural trading partners, for example, Jordan sophistication of imported goods. Since the mid- benefits more from the European Union and 1990s, the share of imported high-tech products Mexico benefits from Canada and the United in GDP has increased by more than 50 percent in States (Schiff and Wang 2006b). low-income countries and by 70 percent in mid- However, the extent to which imported dle-income countries (table 3.1).3 Among devel- technology boosts the sophistication of do- oping regions, East Asia and the Pacific has mestic technological activity either directly or the highest share of high-tech imports in GDP indirectly through spillovers depends on the (8.4 percent), with the highest share being for quality of a country’s technological absorptive Malaysia (37 percent) and the Philippines capacity. Thus while using an imported capital (18 percent), but Europe and Central Asia has good can lift the technological content of ac- experienced the largest increase, reflecting the tivity in a country, to the extent that importers transition of many of the region’s countries to pay competitive prices for the technology, market economies and their improved access to there may be no net gain to the country (Eaton high-tech products following the relaxation of and Kortum 2001). Moreover, the business Cold War export restrictions. Among regions climate may be too weak or the technological dominated by middle-income countries, high- literacy of the local labor force may be too tech imports represent 3.8 percent of GDP in low to successfully adapt the machinery to Latin America and the Caribbean and 3.6 per- local conditions (Dahlman, Ross-Larson, and cent of GDP in the Middle East and North Africa, Westphal 1987; Rosenberg 1976). As a result, less than in Sub-Saharan Africa (4.5 percent). the country may not realize the potential pro- Low-income countries have also improved ductivity improvements available from im- their exposure to high-technology embedded ported technology (Pack 2006). in foreign products. After hovering around Table 3.1 Trade in technology goods has increased in developing countries Share of high-tech exports Imports of high-tech goods Imports of capital goods in world high-tech exports 1994–96 2002–04 % change 1994–96 2002–04 % change 1994–96 2002–04 % change (% of GDP) (% of GDP) (% of GDP) Regions East Asia and the Pacific 5.9 8.4 42 11.6 12.8 10 9.9 19.0 93 Europe and Central Asia 3.2 7.2 125 7.1 14.7 107 1.0 2.7 163 Latin America and the Caribbean 2.4 3.8 61 5.4 7.2 32 2.1 3.4 61 Middle East and North Africa 2.5 3.6 44 6.3 8.9 42 0.1 0.2 29 South Asia 1.4 2.1 53 3.1 3.8 22 0.2 0.3 58 Sub-Saharan Africa 3.2 4.5 39 9.3 10.5 14 0.1 0.1 4 Income groups High-income countries 3.4 4.7 38 5.5 7.0 27 86.5 74.3 Ϫ14 Upper-middle-income countries 4.2 7.2 71 8.7 13.1 51 6.6 9.6 47 Lower-middle-income countries 3.2 5.4 70 6.9 9.2 33 6.7 15.7 137 Low-income countries 1.8 2.7 53 4.9 5.7 17 0.3 0.4 53 Source: World Bank calculations using Centre d’Etudes Prospectives et d’Informations Internationales’ database, Banque Analytique de Commerce International. 111 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 3.2 Rising share of high-tech imports By region By income group Percent of GDP Percent of GDP 12 9 8 Upper-middle-income countries 10 7 8 6 High-income 5 countries 6 4 4 3 Lower-middle-income countries 2 2 Low-income countries 1 0 0 94 95 96 97 98 99 00 01 02 03 04 94 95 96 97 98 99 00 01 02 03 04 19 19 19 19 19 19 20 20 20 20 20 19 19 19 19 19 19 20 20 20 20 20 East Asia and the Pacific South Asia Europe and Central Asia Sub-Saharan Africa Latin America and Middle East and the Caribbean North Africa Source: World Bank calculations using Centre d’Etudes Prospectives et d’Informations Internationales database, Banque Analytique de Commerce International. 1.8 percent between 1994 and 2001, the aver- 2007). As a result, the benefits of exposure to age share of high-tech imports in low-income trade also tend to be unevenly distributed. countries’ GDP began to rise in 2002, reaching 3.2 percent in 2004 (figure 3.2). Both South Capital goods imports have also increased Asia and Sub-Saharan Africa have enjoyed sig- Although imports of high-tech goods provide nificant increases, although the ratio of high- an indication of an economy’s exposure to tech imports to GDP remains extremely low in technology, this indicator does not distinguish South Asia, less than 3 percent of GDP. In most between imports of technology for consump- countries in Sub-Saharan Africa, the share of tion and imports for production, nor does it imported high-tech goods fluctuates between indicate the extent to which these imports im- 2 and 5 percent of GDP from year to year. prove the technological content of a country’s Mauritius and South Africa import the most economic activities. Technological content high-tech goods relative to the size of their depends importantly on the structure of the economies, between 6 and 8 percent of GDP in economy and the nature (assembly or high any given year, while Somalia imports the valued added transformation) of the work least, less than 1 percent of GDP. done with the imports (box 3.1). Despite developing countries’ increased ex- Imports of capital goods, such as machinery posure to foreign technology through trade, its and equipment, which enable the production of distribution across regions within countries higher quality and more technologically sophis- tends to be extremely uneven, with foreign ticated goods, have a less ambiguous impact on trade concentrated in a few major cities or re- a country’s technological capacity. For coun- gions. For example, 70 percent of high-tech tries operating within the technological fron- trade (both imports and exports) in China orig- tier, a higher share of imported capital goods inates in four regions and is highly correlated in GDP can reflect the presence of strong in- with R&D intensity and foreign firms (OECD vestment activity; a process of technological 112 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S Box 3.1 Technology imports: Different paths for different countries B ased on a breakdown of trade flows by technol- ogy level and by production stage, Lemoine and Ünal-Kesenci (2003) highlight the following divergent level of development, China’s exports display an outstandingly strong high-tech content. • India is characterized by limited participation in integration paths adopted by China, India, and Turkey, international division-of-production processes which all started from a relatively similar degree of and by a low level of imports in high-tech prod- industrial specialization about 10 years ago: ucts. These high-tech imports are evenly distrib- uted among the different stages of production • China has become an assembly country, and the different sectors, while high-tech exports strongly integrated into the international seg- are concentrated in chemical industries. mentation-of-production processes in Asia. • Turkey’s high-tech imports consist mainly of cap- Most of China’s imports of high-tech products ital goods and correspond to a classical form of are parts and components. These high-tech im- technology transfer aimed at upgrading indige- ports are predominantly incorporated into the nous industrial capacities. Turkey’s foreign trade production of exports and are not used to mod- is strongly structured by its traditional comple- ernize domestic production capacities. Given its mentaries with Europe. upgrading; and, over the longer term, a presumably reflecting the relatively autarchic relatively sophisticated structure of produc- policies that governments in the region have tion.4 As a result, relatively technologically so- followed until recently. By contrast, Sub-Saha- phisticated middle-income countries import ran Africa imports substantially more capital more capital goods (as a share of GDP) than less goods, although the ratio of capital goods im- sophisticated low-income countries (table 3.1). ports to GDP has increased less than in other Overall, the share of capital goods in the developing regions since the mid-1990s, with GDP of developing countries has risen substan- the exception of East Asia and the Pacific. The tially over the past decade. Upper-middle- story is particularly varied in Latin America, income countries saw a 51 percent increase in where some countries, such as Costa Rica and the share of these goods in GDP, while lower- Mexico, increased their imports of capital middle-income countries have boosted their re- goods following liberalization policies in the liance on such goods by 33 percent. The former early 1990s, while others did not. The increase group of countries continues to have the largest in the share of capital goods in GDP was par- share of capital goods in GDP, about 13 per- ticularly notable in Costa Rica, where it rose cent, more than double the share of low- from about 7 percent in the mid-1990s to about income countries. As a consequence, the gap 18 percent in 2002–04. between low-income countries (especially the Least Developed Countries [UNCTAD 2007]) Exports of technological goods have and other developing countries has widened. also expanded Europe and Central Asia saw the biggest re- Participation in high-tech export markets has gional increase in imports of capital goods, also been identified as a channel through which reflecting the substantial economic recovery in technology is diffused within developing coun- these countries following the recession that ac- tries. Many case studies suggest that exporting companied the transition to market economies. firms in developing countries benefit from im- As was the case for high-tech imports, South plicit and explicit technological transfers that Asia has the lowest level of imports of capital occur as a result of their interactions with for- goods and has shown little improvement, eign buyers. Benefits accrue because foreign 113 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 buyers may have higher quality standards than Figure 3.3 Exports of low-, medium-, and domestic buyers. Foreign buyers may also as- high-technology goods sist with process improvements and provide in- formation about and experience with foreign Percent of total merchandise exports 40 markets. Moreover, the additional demand that foreign markets provide may allow for the 35 exploitation of economies of scale that justify 30 more capital-intensive production (see, for ex- 25 ample, Hobday 1995 and Rhee, Ross-Larson, 20 and Pursell 1984 on the effects of learning by 15 exporting in East Asia). Technology transfers 10 through exports may be most important in 5 production networks with clearly articulated 0 supply chains (Gereffi 1999; Hobday 1995).5 1994–96 2002–04 1994–96 2002–04 1994–96 2002–04 Spillovers may also be common in labor-inten- High-tech Medium-tech Low-tech exports exports exports sive sectors where production processes are rel- atively simple and the relevant knowledge is High-income countries widely available in industrial countries (Enos Upper-middle-income countries and Park 1987; Hou and Gee 1993). Lower-middle-income countries Low-income countries Unfortunately, these efficiency benefits from exporting are not confirmed by econometric Source: World Bank calculations using Centre d’Etudes studies (Keller 2004), which generally find that Prospectives et d’Informations Internationales database, Banque Analytique de Commerce International. the positive relationship between exporting and productivity results largely from the self- selection of firms into the export market.6 if China is excluded). Moreover, the share of Whatever the magnitude of spillovers from higher-technology goods in the total merchan- exports and of concerns surrounding the re- dise exports of these countries has also been in- export nature of some high-tech exports, the creasing (figure 3.3). Much of this increase re- export of technology products is nevertheless flected the transfer of manufacturing processes an important indicator of technological from high-income countries to developing achievement. High-tech exports offer better countries, notably those in East Asia and the Pa- prospects for future growth than lower-tech cific. China was a major beneficiary of this goods because their market has been expanding process, increasing its global market share of more rapidly and because they offer superior high-tech exports from about 3 percent to 11 per- spillover potential by transmitting skills and cent, but so too were other countries. The generic knowledge that can be used in other ac- Philippines, for example, increased its market tivities (Guerrieri and Milana 1998). High-tech share from 0.9 percent to about 2.0 percent. exports are also less vulnerable to easy entry by Upper-middle-income countries made less spec- lower-wage competitors, substitution by tech- tacular progress, increasing their global market nical change, and market shifts (Lall 2001). share from 6.5 percent to 10.5 percent, although Although high-income countries continue to some countries, such as Costa Rica, the Czech dominatetheworldmarketforhigh-techgoods,7 Republic, and Hungary, were able to increase middle-income countries have substantially in- their high-tech markets significantly.8 In Sub- creased their market share since the mid-1990s. Saharan Africa, South Africa is the largest ex- Lower-middle-income countries more than dou- porter of high-tech products, but its share has re- bled their global share of high-tech exports, in- mained small and stable at about 0.08 percent. creasing them from 6.6 percent in the mid-1990s The relative performance of different to 15.7 percent in 2002–04 (3.4 to 5.0 percent middle-income regions reflects different levels 114 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S of technological capabilities and learning translate that into improved export perfor- styles. Since the early 1990s, Latin America mance and an increase in the technological has almost doubled its share of high-tech sophistication of their own exports has varied, products in world markets and now has the with countries like those in Europe and Central second largest market share after East Asia Asia that have relatively well-educated popula- and the Pacific. However, in contrast with Eu- tions and a strong institutional structure hav- rope and Central Asia and the Middle East ing extracted the greatest benefits. Among and North Africa, it has done so with rela- other countries, notably low-income countries, tively little input from imported technology weak absorptive capacity may be restricting (imports of high-tech and capital goods as a the extent to which their economies have ben- share of GDP in Latin America and the efited from the increased exposure. Caribbean are half the rate of Europe and Central Asia). Partly as a consequence, Europe Foreign direct investment and Central Asia has gained market share in Like trade, FDI can be a powerful channel for high-tech goods much more quickly than the transmission of technology to developing Latin America, and based on recent perfor- countries by financing new investment, by mance, is poised to overtake that region soon. communicating information about technology Low-income countries remain marginal to domestic affiliates of foreign firms, and players in the world market for high-tech by facilitating the diffusion of technology to goods, and even though their global share of local firms. exports of medium-tech goods has doubled, be- tween the mid-1990s and 2002–04, it remains Foreign investors bring both equipment low at 0.8 percent. The share of low-income and know-how countries in world exports of low-tech goods Measuring the technological contribution of is more substantial and has increased from FDI is particularly difficult, in part because 3.5 percent to 5.2 percent. Among these coun- the standard measure from the balance of pay- tries, Vietnam has improved its global market ments includes both physical (brownfield and share of low-tech products from 0.2 to 0.8 per- greenfield) investments and financial invest- cent, a 250 percent increase. India remains the ments (mergers and acquisitions). This said, most important exporter of low-tech products FDI inflows to developing countries rose from in this income group with 2 percent of the $10 billion in 1980 to an estimated $390 bil- world market, second after China among de- lion in 2007, or from 0.4 to 2.9 percent of veloping countries, which accounts for about GDP, with the bulk of the increase occurring 17 percent of the world’s low-tech exports. during the late 1990s in response to the liber- alization of FDI policies.9 Assuming that for- Overall exposure to foreign technologies eign firms employ a higher level of technology has increased than the average domestic firm, then this ris- Overall, the increased participation of devel- ing trend will have increased the average level oping countries in global trade has substan- of technology in these countries, as well as tially increased their exposure to foreign tech- their exposure to higher technologies. nologies. For middle-income countries, this FDI as a share of GDP has risen in all de- exposure and the attendant expansion of high- veloping regions and income groups since the tech exports have likely yielded important side 1980s, but the increase has been concentrated benefits that are reflected in the sustained in middle-income countries, where FDI rose to acceleration in developing country growth almost 3 percent of GDP (table 3.2). East Asia rates over the past 15 years. While the increase and the Pacific had the highest ratio during the in trade openness has been generalized, the 1990s, but it has since declined, in part be- extent to which countries have been able to cause of a collapse in FDI inflows to a few 115 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table 3.2 Foreign direct investment as a percent of GDP 1970–79 1980–89 1990–99 2000–06 All developing countries 0.5 0.4 1.5 2.7 By region East Asia and the Pacific 0.5 0.5 2.8 2.3 Europe and Central Asia 0.3 0.1 0.9 2.2 Latin America and the Caribbean 0.6 0.7 1.5 3.5 Middle East and North Africa 0.5 0.5 0.6 1.1 South Asia 0.0 0.1 0.4 0.7 Sub-Saharan Africa 0.7 0.4 1 2.5 By income groups Low-income countries 0.3 0.2 0.8 1.1 excluding India 0.6 0.4 1.4 1.8 India 0.0 0.0 0.3 0.7 Middle-income countries 0.5 0.4 1.6 2.9 Source: World Bank 2007a. countries affected by the East Asian financial in total FDI has been rising. Nevertheless, the crisis in the late 1990s (particularly Indonesia), foreign component of aggregate investment in and in part because FDI inflows to China, al- developing countries has likely been rising though still high, have failed to keep pace with along with the extent of technological transfer the rapid growth of output. Meanwhile in through this channel. Moreover, the transfers in Latin America and the Caribbean, efforts to in- know-how, business process technology, and crease trade openness resulted in a boom of FDI market knowledge associated with mergers and inflows, which reached an average of 3.5 per- acquisitions can occur whether or not any asso- cent of GDP in 2000–06. In Europe and Cen- ciated physical investment is involved, and may tral Asia, FDI rose from next to nothing before even be more important. the breakup of the Soviet bloc to 2.2 percent of Foreign firms may also improve the tech- GDP in 2000–06. In the Middle East and nological capacity of developing countries by North Africa and South Asia, FDI remains low at around or less than 1 percent of GDP. Most recently, FDI inflows to Sub-Saharan Africa Table 3.3 Foreign direct investment as a percent of fixed capital formation have surged, reflecting substantial investment in oil and mineral production and a more 1970s 1980s 1990s 2000s generalized interest in the region stemming Regions from increased political stability, liberalization East Asia and of FDI policies over the past 15 years, and the Pacific 1.9 3.0 12.2 8.4 improved growth performance. Europe and Central Asia 2.8 — 8.1 15.5 One way that FDI boosts technology Latin America transfer is by financing new machinery and and the Caribbean 3.3 0.1 11.3 13.1 equipment purchases. The share of FDI in Middle East and North Africa 2.8 2.1 3.7 6.5 developing countries’ fixed capital formation South Asia 0.3 0.4 2.5 4.1 increased from 2.9 percent in the 1970s to 10.7 Sub-Saharan Africa 3.6 2.2 9.3 18.6 percent in this decade (table 3.3), with the in- Income groups Low-income countries 2.2 1.3 5.6 6.7 crease in middle-income countries being more Middle-income countries 2.9 1.9 11.0 11.3 pronounced than in low-income countries. All developing However, FDI includes mergers and acqui- countries 2.9 1.8 10.4 10.7 OECD countries 13.5 11.3 3.5 11.5 sitions that may involve no additional physical Source: World Bank 2007a. investment, and the share of mergers and ac- Note: — ϭ not available; OECD ϭ Organisation for quisitions, including privatization transactions, Economic Co-operation and Development. 116 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S growth in Mauritius, 50 percent of all firms Figure 3.4 Share of foreign affiliates in operating in export-processing zones were lo- business R&D expenditure cally owned, founded, managed, and staffed— Percent in many cases by employees who had received 70 on-the-job training in foreign enterprises and 60 had left to set up their own companies (Rhee, 50 Katterback, and White 1990). Already existing local firms may also ob- 40 serve the actions of foreign firms and learn 30 about new products, equipment, marketing 20 techniques, and management practices. For ex- 10 ample, 25 percent of the managers of Czech firms and 15 percent of the managers of Latvian 0 firms report that they learned about new tech- (2 lic ge a ov P tvia (2 a La a In (2 ia ai ) B y C Es 0) (1 2) 9) ex thu il C d rk pu d Th 01 Ar hin o ni in r Li raz le n n Tu Re lan ey b ga nologies by observing foreign firms as they en- 00 di 00 99 ic a nt hi to la 0 un ak o H a tered their industry (Javorcik and Spatareanu M 2005). In Morocco and Tunisia, domestically Sl Sources: OECD; Activity of Foreign Affiliates database. owned international call centers have risen in http://www.sourceoecd.org; UNCTAD 2005; Eurostat; R&D statistics. imitation of foreign firms (box 3.2). Note: The year is 2003 unless otherwise indicated. If multinational entry leads to an increase in demand for intermediates, it may result in the expansion of upstream domestic industries financing R&D. Multinational corporations (see the experience with Zambian supermar- undertake most of their R&D activities in kets in box 3.3). Downstream industries may their home country or in other high-income also benefit from the increased competition countries.10 Nevertheless, the role of develop- and added variety of inputs created by the for- ing countries appears to be rising. R&D eign investment. In addition, foreign investors spending in developing countries by majority- may provide advice, designs, direct produc- owned foreign affiliates of U.S. parent compa- tion assistance, or marketing contacts to sup- nies increased from $0.9 billion in 1999 to pliers, which the latter can then deploy more $1.6 billion in 2003 (Bureau of Economic broadly than simply providing cheaper or Analysis 2007). The contribution of multina- more reliable inputs to the foreigners.12 tionals’ R&D to total measured R&D activity The entry of multinationals is likely to in- in developing countries varies from more than crease competition for the domestic firms 60 percent in Hungary to less than 5 percent in within the industry, potentially forcing them India (figure 3.4). to improve their efficiency and introduce new technologies or business strategies FDI may generate technology spillovers (Blomstrom, Kokko, and Zejan 2000), as in In addition to its technological impact on the Wal-Mart’s joint venture in Mexico (box 3.4). firm directly touched by the investment, FDI Such competition can make surviving domes- may also affect the level of technology in tic competitors stronger, but other domestic domestic firms.11 Spillovers can arise when firms may be driven out of business, lose mar- workers receive training or accumulate experi- ket share, and experience a loss of high-skilled ence working for multinationals and then workers and higher costs for intermediate move to domestic firms or set up their own en- goods resulting from increasing demand from terprise (Fosfuri, Motta, and Ronde 2001; the foreign-owned firms.13 These effects may Glass and Saggi 2002). For example, within vary by industry depending on factors such six years of the beginning of FDI-led export as the market structure before the entry of 117 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Box 3.2 European call centers in the Maghreb have inspired local entrepreneurs and prompted a specialization in high-value-added services L eading call center companies from France and Spain have paved the way for domestically owned and export-oriented call centers in Morocco recognition of large foreign-owned firms and have had difficulty obtaining contracts from foreign companies. In addition, most of them are small, with and Tunisia. Although call centers existed in a maximum of 100 to 200 employees, compared with Morocco and Tunisia before the first European call more than 2,000 positions at some foreign-owned call centers outsourced operations to the region in the centers. early 2000s, domestically owned firms served the Interestingly, many domestically owned firms, local market and provided only basic telecommuni- such as Outsourcia in Morocco, have chosen to cations services. Only after Atento (a Spanish-owned differentiate themselves by targeting higher value subsidiary) set up a call center in Morocco and added services. High turnover rates have also helped Teleperformance (a French-owned firm) settled in domestically owned firms to hire experienced agents Tunisia to serve clients in Europe did local entrepre- who were trained in the foreign call centers. neurs jump into the European market. This transition was not without problems. Locally owned call centers lack the international name Source: World Bank forthcoming. Box 3.3 South African investment in Zambia’s retail sector has improved the quality of local produce and farmers’ earnings T he liberalization of the Zambian distribution sec- tor allowed the inflow of foreign retail companies, which replaced some of the traditional retail sector South Africa. Farmers’ cooperatives that benefited from donor-funded technical assistance have since managed to improve the quality of their products and with modern supermarkets and added both upstream services, and Shoprite is now sourcing 90 to 95 percent and downstream benefits to the domestic economy. of its fresh produce from Zambian farmers. In the case Consumers benefited from lower costs, while local of one cooperative, farmers’ cash income has increased suppliers learned new production and marketing tech- from $2 to $3 a month to $50 to $70 a month, and niques that enabled them to improve the quality, effi- local access to health care and education services has ciency, and revenues of their operations. improved. The supermarkets themselves are providing When Shoprite of South Africa first opened super- local farmers with technical assistance. Agricultural ex- markets in Zambia, it found that the quality and perts from the retailer’s subsidiary visit farms, give ad- quantities provided by individual local smallholder vice on crop sequencing, and provide inputs. farmers were too low and too unreliable, and there- fore imported 90 percent of its fresh produce from Source: Mattoo and Payton 2007. 118 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S Box 3.4 Wal-Mart’s entry in Mexico boosted the Mexican soaps, detergents, and surfactants industry T he Aurerra–Wal-Mart joint venture, which cre- ated Walmex, followed Mexico’s reduction in tariffs and liberalization of FDI in the late 1980s. By owned suppliers, with many firms adopting techniques and products first introduced into the market by their multinational competitors. exercising its bargaining power, Walmex squeezed As a result of these spillovers and labor shedding, profit margins among the major soaps, detergent, the surfactants sector rapidly improved its value added and surfactants suppliers, offering them higher vol- per worker. The newly found competitiveness and ex- umes in return. posure to the requirements of Walmex and other for- Local firms that were not efficient enough to meet eign retailers on the domestic market has allowed the Walmex’s terms lost market share, and many failed. Mexican surfactants sector to expand its exports and Those that survived grew and became more efficient market share in the United States, targeting the Latino and innovative. The quality and efficiency of their community in which their brands are known. overall operations benefited from their interactions with both their client (Wal-Mart) and with foreign- Source: Javorcik, Keller, and Tybout 2006. foreign multinationals, the R&D intensity of The level of spillovers also depends on the the products, and the links between foreign domestic absorptive capacity. For example, firms and domestic firms in upstream and other advanced countries tend to gain from downstream sectors.14 technology spillovers from the activities of subsidiaries of U.S. multinationals, while poor Outsourcing decisions, domestic policies, countries do not (Xu 2000). Firms using ad- and absorptive capacity all affect spillovers vanced technology in low-income countries Evidence indicates that spillovers to local sup- fail to achieve the same level of productivity as pliers are not uniform across countries or firms in industrial countries (Acemoglu and across industries within a country.15 Multi- Zilibotti 2001) or the same kinds of spillovers nationals may choose not to source inputs lo- as in middle-income countries, in part because cally because of concerns about the quality of the gap between the quality and human capi- local inputs or the time required to develop tal of the domestic workforce and that for relationships with local suppliers or because which the equipment was originally designed of centralized sourcing arrangements that may is too large (Borensztein, de Gregorio, and Lee provide volume discounts or access to cus- 1998). In general, spillovers may be more tomized inputs (UNCTAD 2001). In host common when the difference in technological countries with underdeveloped upstream sec- levels between the foreign multinational and tors or in cases of FDI with very specialized the domestic economy is not too large. input needs, the scope for spillovers to up- As discussed earlier, the extent to which a stream sectors may be limited. Policies may country benefits from spillovers to the rest of also reduce the potential for spillovers. For ex- the economy also depends on the country’s ample, in a highly protected market, foreign policy stance on basic technological literacy plants may operate at an inefficiently small and more advanced skills and on promotion scale (Moran 2007). Requirements that for- of the adoption and diffusion of technologies eign firms enter into joint ventures with local within the economy. For example, some coun- companies may discourage use of the most ad- tries such as Mexico and the Philippines have vanced technology to avoid leakage to poten- benefited relatively little from FDI spillovers tial competitors (Beamish 1988). because FDI inflows, although abundant, have 119 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 been oriented toward exploiting low wages licensing of technologies are two other, more and have not built many links to the domestic direct mechanisms by which developing coun- economy. In contrast, countries like Singapore tries acquire foreign technologies and research have actively sought to maximize the technol- expertise. ogy spillovers from FDI by investing in the Over the past 20 years, firms domiciled in domestic skills and competencies necessary to developing countries have increasingly turned support high-skill and high value added indus- to foreign acquisitions as a means of expanding tries and by welcoming and promoting FDI in their market share and gaining control over such sectors (Lall 2003). technology. Cross-border mergers and acquisi- tions by multinational corporations located in Spillovers might be highly concentrated developing countries increased from $400 mil- in certain regions within a country lion in 1987 (less than 1 percent of global Geographic proximity also determines the merger and acquisition transactions) to almost extent of technological spillovers observed. $100 billion in 2006 (almost 9 percent of global The closer a local firm is to a foreign-owned merger and acquisition transactions) (World firm, the more frequently will the firms’ em- Bank 2007a). Although technology may not be ployees interact with each other, increasing the the primary motivator in many of these pur- likelihood that employees (and their acquired chases, technology transfer is associated with knowledge) will move between the two firms. nearly all of them in the form of control over The spatial aspect is also important for verti- patents and knowledge of manufacturing cal spillovers between foreign-owned firms processes, marketing, and business process ex- and their local suppliers, which are often lo- pertise. Table 3.4 summarizes some of the more cated close to each other (Jaffe 1989). technologically important recent acquisitions The existence of such cluster effects may of high-tech firms by developing country firms. explain why FDI tends to be geographically Developing country firms may seek to ac- concentrated within a country mainly around quire a brand or a marketing or distribution net- large cities or coastal states. In Russia, for ex- work. Examples include the Thai Union Frozen ample, more than two-thirds of the FDI stock Company’s purchase of the Chicken of the Sea in 2000 was in Moscow and three surround- brand; the South African Brewery’s purchase of ing regions (Broadman and Recanatini 2005). Miller Brewing (a major U.S. beer maker); and Similarly, almost half of FDI flows in India go Malaysian Berjaya’s purchase of Taiga, the to the Mumbai and Delhi areas (Reserve Bank largest Canadian distributor of building materi- of India 2007), while in China, almost 90 per- als. Developing country firms may also purchase cent of FDI flows go to the western coastal re- foreign firms to acquire R&D capacity. For ex- gion (Kui-Yin and Lin 2007). This said, be- ample, the Chinese company Shanghai Automo- cause of data limitations and conceptual tive Industry Corporation bought Sangyong of problems, econometric support for the notion the Republic of Korea to enhance its R&D that such clusters generate important technol- capabilities in sport utility vehicles. Accessing ogy spillovers is limited (Lipsey and Sjohom foreign technology also takes the form of estab- 2005), with some studies supporting their ex- lishing R&D centers in developed countries. For istence (see Girma and Wakelin 2001 for the example, Huawei Technologies and ZTE electronics sector in the United Kingdom) and Corporation, both Chinese companies, have others not (see Aitken and Harrison 1999 for established R&D centers in Sweden. Venezuela and Sjoholm 1998 for Indonesia). Developing countries also purchase foreign Developing countries can also license high-tech firms foreign technologies Outward FDI, that is, the purchase of foreign Developing countries can also gain access to firms by domestically owned ones, and the technology through licensing, which typically 120 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S Table 3.4 Selected purchases of high-tech firms by companies in developing countries, early 2000s Acquiring company Country of acquirer Year Acquired firm Country of acquired Industry Netcare South Africa 2006 General Health Care United Kingdom Health Tata Tea India 2006 Tetley United Kingdom Tea Videocon Industries Ltd. India 2006 Daewoo Electronics Korea, Rep. of Electronics Chalkis China 2005 Le Cabanon France Food processing Essel Propack India 2005 Telcon Packing United Kingdom Tube packing Wipro India 2005 New Logic Austria Semiconductors Orascom Egypt, Arab Rep. of 2005 Wind Italy Telecommunications Lenovo China 2004 IBM United States PC manufacturing TCL China 2004 Alcatel France Telecommunications Ranbaxy India 2004 RPG France Pharmaceuticals BOW Technology Group China 2003 Hynix Korea, Rep. of PC manufacturing PKN Orlen Poland 2002 BP (500 petrol stations) United Kingdom Downstream oil Source: World Bank 2007a. involves the purchase of production or distri- rights is weak, multinationals may be less will- bution rights for a product and the underlying ing to license technology for fear of it being technical information and know-how for pro- copied by domestic firms. Alternatively, they ducing it. As measured by the payment of in- may only be willing to license out-of-date ternational royalties and fees in countries’ technologies (Maskus 2000). Data on U.S. balance of payments, licensing fees paid by de- multinationals show that the likelihood of veloping countries increased from $7 billion in entering into licensing agreements increases as 1999 to $22 billion in 2006, about a fivefold developing countries increase their protection increase when expressed as a percentage of of intellectual property rights (Antras, Desai, developing country GDP.16 The increase was and Foley 2007). sharpest for oil- and mineral-exporting coun- Some countries have pursued a licensing- tries, reflecting higher prices for oil and based strategy of technology acquisition in the contracts that often expressed these fees as a percentage of revenues or profits. Nevertheless, licensing fees paid by other developing coun- Figure 3.5 Licensing payments have risen tries also tripled, and for both low- and middle- sharply income countries these fees represented a larger Percent of GDP share of overall GDP than they did for oil- and 0.25 mineral-exporting countries (figure 3.5). Middle-income countries Low-income countries Licensing can be used as a substitute for 0.20 FDI. Uncertainty about the policy environ- ment may lead multinationals to sell technol- 0.15 2000–06 ogy rather than to exploit the technology 1995–99 through foreign investment (domestic firms 0.10 1990–04 may have more information or may be better 0.05 placed than foreigners to deal with a poor pol- icy environment). Evidence suggests that both 0 FDI and licensing respond to an adequate busi- Oil and Other Oil and Others ness environment, and factors such as patent mineral mineral exporters exporters protection may shift incentives for investors Sources: Balance of Payments Database (IMF) and World from FDI toward licensing (Maskus 2002). Development Indicators. Where protection of intellectual property 121 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 belief that domestic firms will be able to up- electronics sector in Taiwan, China (Chandra grade their own technological capacities by and Kolavalli 2006). The latter study also working with licensed technology. For exam- highlights that even though licensing may en- ple, in the 1950s and 1960s, Japan kept its able rapid acquisition of product and process economy relatively closed to FDI to encourage know-how, it also requires a significant level of multinationals that wished to gain from the local technological capability to put the growing Japanese market to license technol- licensed technology to work. ogy to domestic firms (Pack and Saggi 1997). China has also encouraged joint ventures, as International migration opposed to FDI, to maximize technology Along with trade and FDI, international mi- transfers to local firms. This strategy is likely grants are another important channel for the to work only if the country has sufficient mar- transmission of technology and knowledge. ket power. Moreover, such discriminatory From the perspective of developing countries, policies run the risk of resulting in the transfer however, the direction of technology transfer of substandard technologies (Hoekman and can be both outward (as migrants take away Javorcik 2006). In contrast, several Latin scarce skills) or inward (through contacts with American countries discouraged the licensing the diaspora). of technology from abroad because of con- The direction and scale of technology flows cerns about unfair pricing and competition that result from international migration are with local technologies, a strategy that re- less clear than for FDI and trade. On the one tarded or skewed technological development hand, the brain drain associated with better in that region (Pack and Saggi 1997). educated citizens of developing countries The bulk of international royalties and fees working in high-income countries is a serious stems from intrafirm transfers. In part, this problem for many developing countries. On may reflect a preference by multinational the other hand, the contribution that these in- firms to transfer more advanced technologies dividuals would have made had they stayed only to wholly owned subsidiaries rather than home is uncertain given the lack of opportuni- to partially owned affiliates and to enter mar- ties in some countries. Moreover, developing kets through wholly owned subsidiaries rather countries can benefit from the immigration, than through joint ventures (Javorcik 2006; albeit often temporary, of managers and engi- Mansfield and Romeo 1980). However, it may neers that often accompanies FDI; the return also mean that these fees are being used as a of well-educated developing country emi- mechanism for repatriating profits, perhaps grants; and the contacts with a technologically for tax reasons. As a result, the level of royal- sophisticated diaspora. ties and fees may not be a market-based re- High rates of skilled out-migration imply a flection of the value of technology purchased net transfer of human capital and scarce re- by the local subsidiary (Robbins 2006). sources (in the form of the cost of educating Partly because of intrafirm payments and of these workers) from low- to high-income the close relationship between licensing and countries (UNCTAD 2007; World Bank FDI, economists have had difficulty in evaluat- 2006a). For some countries, the brain drain ing the impact of licensing on technology represents a significant problem: emigration transfer. Nevertheless, a few case studies have rates of highly educated individuals can ex- documented its benefits. Brazil and Korea ceed 60 percent in some small countries (fig- achieved considerable success in absorbing ure 3.6), and since 1990, the highly educated new technologies through licensing (Correa diaspora of developing countries has doubled 2003), and licensing agreements were an in size.17 However, the share of developing important factor for the success of flori- country tertiary-educated individuals living culture in Kenya, maize in India, and the abroad remained stable and relatively low, 122 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S those with a tertiary education is 4 percent, Figure 3.6 The brain drain is a severe but the rate for graduates of the elite Indian problem in a number of small countries Institutes of Technology ranged from 20 to % of tertiary-educated individuals in OECD countries, 2000 30 percent in the 1980s and 1990s (Docquier Suriname 90 and Marfouk 2004; Khadria 2004). Guyana 86 More moderate migration rates may be ben- Jamaica 83 eficial, especially when domestic opportunities Haiti 82 are limited, because of technological transfers Trinidad and Tobago 78 Tonga 74 from the diaspora and because most migration St. Kitts and Nevis 72 is not a one-way flow. For example, a majority Antigua and Barbuda 71 of foreign students from many developing Cape Verde 69 countries who earn their doctorates in the Grenada 67 United States return home (figure 3.7), bring- 0 10 20 30 40 50 60 70 80 90 100 ing with them a great deal of technological and market knowledge that represents an impor- % of low-, medium-, and high-skilled individuals living in OECD countries, 2000 tant technological transfer in favor of the de- 14 Low skilled veloping country. 12 The share of recent doctoral graduates from Medium skilled developing countries who remain in the host 10 High skilled country varies significantly across countries of 8 origin. In part, these cross-national differences 6 reflect differences in opportunity costs. The likelihood that a student remains in the United 4 States after graduation falls as average per 2 capita incomes in the home country rise. How- 0 ever, even at a given income level, the length of ia stay varies significantly across countries, with be ca ci ia ric n r ic t l A and As Af as Af ara Pa s ib ri an fic a e tA a th tin ia th E ar e h h C Am tra e s ut or le fewer graduates returning home to countries th as Sa en p N dd So C uro E b- d Mi Su E d La such as Argentina, China, India, and the d e an an Islamic Republic of Iran than would be ex- an Source: World Bank staff calculations based on Docquier pected based on income alone. Other factors and Marfouk 2004. explaining high retention rates include the Note: OECD = Organisation for Economic Co-operation and quality of living conditions and research facili- Development. ties in high-income countries, as well as the density of research networks and the size of the preexisting diaspora. Factors favoring a return ranging from 5 to 13 percent depending on the include proximity to family, cultural affinities, region (figure 3.6), because the number of and emigrants’ desire to contribute to techno- such individuals also doubled. logical progress in their native country.18 The emigration of professionals who make a direct contribution to production, such as The diaspora is a major source of skills engineers, may result in reduced rates of do- and capital mestic innovation and technology adoption Repeated waves of emigration have led to the (Kapur and McHale 2005a). Emigration rates creation of vibrant diasporas that possess for scientists, engineers, and members of the cutting-edge technology, capital, and profes- medical profession tend to be higher than for sional contacts. For example, developing the general university-educated population. countries accounted for three-quarters (ap- For example, in India, the emigration rate for proximately 2.5 million) of the 3.3 million 123 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 3.7 Share of Ph.D. students still living in the United States five years after graduation a. Share of foreign Ph.D. graduates who remain in b. Higher home-country incomes are associated with the United States for five or more years lower retention rates Percent No. of graduates, 1996 Percent 100 1,600 100 Number graduating in CHN 1996 (right scale) IND Stay back rate 80 (left scale) 80 1,200 IRN 60 60 TUR ARG 800 EGY ZAF 40 40 PER COL BRA 400 CHL MEX 20 20 IDN KOR 0 0 0 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 In a Ar Ir a ge an ab ur a So R key an Pe a M bia C o re B ile ne f a om a , C ru Af f do . o In ep il h o n di Ar T tin ric ic si ol in R z h hi ut ep. a, ra ex C h n Log of per capita gross national income in 2001 C iw Ko Ta t, yp Eg Source: World Bank calculations based on Finn 2003. Note: Country mnemonics follow ISO standards. immigrant scientists and engineers living in the United States in 2003.19 Moreover, because Figure 3.8 High-skilled emigrants out-migration rates are higher for high-skilled are disproportionately represented in the diaspora individuals than for low-skilled individuals, on average, the diaspora is much more skilled Percent of emigrants, 2000 than the home-country population and repre- 60 sents an important concentration of expertise 50 High skilled (figure 3.8). Notwithstanding the size of the Medium skilled diaspora, relatively little rigorous empirical 40 research exists on whether and to what extent 30 it influences technology adoption and creation in emigrants’ home countries.20 The primary 20 evidence of diaspora contributions to knowl- 10 edge transfers comes in the form of case stud- 0 ies. At a minimum, the technical, market, and ia be nd ci ia ric n Af nd tin l A nd As Af ara marketing knowledge of national diasporas is Pa s ib a an a e tA a fic th t a La tra a th Am ia ric h ar a h s e ut or as C r ic th as Sa en p a huge potential technological resource.21 So C uro N E e e E b- e Su E dl id Returning migrants can be a major source d M an of entrepreneurship, technology, marketing Source: Docquier and Marfouk 2004. knowledge, and investment capital (Brinker- hoff 2006a, 2006b; Kapur 2001).22 Migrants returning to Egypt tend to have higher levels of work abroad (McCormick and Wahba 2003; human capital than nonmigrants and are likely Wahba 2007). Returning migrants and mem- to be more entrepreneurial the longer they bers of national diasporas who are still abroad 124 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S Box 3.5 Technological transfers through the diaspora and return migrants: Some examples A n émigré from Bangladesh working in the finan- cial sector in the United States returned to help create the Grameen Phone network and make mobile Bata Shoes of the Czech Republic is an early exam- ple of technology diffusion through migration and re- turn. Faced with the threat of bankruptcy at his small phones available to poor people in remote villages shoemaking business in the early 1900s, the founder (Sullivan 2007). Through its successful Village Phone of the company, Tomas G. Bata Sr. went to the United Program, the network has provided business oppor- States in 1904 to learn more efficient mass production tunities to some 260,000 Village Phone operators, methods. Bata returned to the Czech Republic to mostly poor rural women. Grameen Phone now has apply these production techniques. He eventually 15 million customers, more than 10 times the maxi- expanded production to several other countries, in- mum potential client base initially estimated by cluding India, Poland, and the former Yugoslavia, and Bangladesh Telecom. became the world’s leading footwear maker by the In India, Sam Pitroda, a global entrepreneur who 1930s. Faced with nationalization in 1945, the divides his time between India and the United States, founder’s son moved his family and the company’s founded the Center for Development of Telematics, headquarters to Canada, returning to the Czech Re- which developed rural automatic telephone exchanges public once again in 1989 with a further transfer of and introduced shared public call offices all over technology and business know-how acquired over the the country, thus expanding access to cheap and reli- intervening years. Since then, the Bata company has able domestic and international calling. The rela- continued to spread technology. It has opened stores in tively low-cost telephone exchanges are designed to Croatia, Poland, Russia, and Slovenia, as well as a operate without air conditioning and require signifi- production facility in China, and is modernizing its cantly less maintenance than conventional ex- Batanagar factory complex in India. changes. The technology has been exported to sev- eral other developing countries. Source: http://www.bata.com; Factiva; Telenor press releases. have made major contributions to technologi- culturally and nationally linked groups, and cal progress in their home countries (box 3.5). shared ethnicity appears to counteract the kind The diaspora also contributes to technology of home bias effects that underpin the geo- transfers and adoption by strengthening trade graphic network or the cluster effects that give and investment linkages. The high-skilled dias- high-density R&D zones an innovation advan- pora of countries such as India has contributed tage (Agrawal, Kapur, and McHale 2004). to the growth of the information technology sector, outsourcing (Kapur and McHale 2005b; Diaspora networks and returnees help Pandey and others 2006), and FDI in their promote technology adoption home countries. The flow of outward FDI from The diaspora’s political engagement in home the United States is strongly correlated with the countries can also improve local technological stock of migrants from the origin country.23 absorptive capacity, both through return and Nearly half of the $41 billion in FDI that China by exercising pressure on home country politi- received in 2000 may have originated from its cians from afar. Many leaders of developing diaspora abroad (Wei 2004). Similarly, 60 per- countries were educated abroad and returned cent of the increase in bilateral trade in differ- to strengthen political institutions in their coun- entiated products within Southeast Asia may be tries of origin (Easterly and Nyarko 2005). In attributable to ethnic Chinese networks (Rauch addition, migrants have often played a valuable and Trindade 2002).24 Moreover, technology role in the transfer of market-based institutions, appears to diffuse more efficiently through such as venture capital, entrepreneurship, and 125 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 corporate transparency, to their countries of billion in 2006, and are now are larger than origin.25 Overseas Taiwanese engineers and FDI and equity inflows in many countries, es- returnees, for example, worked closely with pecially small, low-income countries. Remit- policy makers to establish a successful venture tances can support the diffusion of technology capital industry. This has provided local entre- by reducing the credit constraints of receiving preneurs with an alternative source of finance, households and encouraging investment and which has helped them overcome the constraint entrepreneurship (Fajnzylber and López 2007; posed by the reluctance of state-owned finan- Puri and Ritzema 1999; Woodruff and cial institutions to lend to high-risk entrepre- Zenteno 2007; World Bank 2006a). A survey neurial activities in the technology sector of self-employed workers and small firms in (Kuznetsov 2007). Mexico found that remittances were responsi- Expatriate knowledge networks have been ble for one-fifth of the capital invested in mi- created to foster regular contacts; transfers of croenterprises in urban Mexico (Woodruff skills; and opportunities for business with re- and Zenteno 2001). In the Philippines, house- searchers, scientists, and entrepreneurs in the holds work more hours in self-employment country of origin. Brown (2000) identified 41 and become more likely to start relatively such networks for 30 different countries. capital-intensive household enterprises in re- These networks tend to be rich depositories of sponse to an exogenous increase in remit- talent with high concentrations of members tances (Yang 2006). with advanced degrees, many earned in the Remittance flows have also contributed host countries.26 Colombia’s Red Caldas net- to the extension of banking services (often work, set up with government assistance in by using innovative technologies), including 1991, was one of the first diaspora networks microfinance, to previously unserved, often that succeeded in promoting collaborative re- rural, sectors. This has improved the access search between domestic scientists and Colom- of households and firms to financial services bian researchers abroad through workshops (box 2.8; Gupta, Pattillo, and Waugh 2007), and symposiums, joint research programs, vis- and their ability to purchase and invest in iting researchers, scientific events, publica- technology. For example, remittance rev- tions, and research and training opportunities enues may have helped Ghana’s ApexLink (Chaparro, Jaramillo, and Quintero 2006). and Mongolia’s Xac banks to expand their Less formal networks played an important role networks and services (Isern, Donges, and in the transition of the Republic of Korea and Smith 2006). Cell phone money transfers, Taiwan (China) from developing to high- such as G-cash and Smart Padala in the income economies.27 Some diaspora networks Philippines, and card-based remittances are have failed, principally because they were too becoming prevalent in a number of countries, ambitious, particularly in cases where the pol- including Mozambique, South Africa, and icy and institutional environment in the home the United Arab Emirates, and are likely to country were not supportive.28 Research sug- expand to other countries in the coming gests that the most successful models start years (Helms 2006; Jordan 2006). Remit- small to build up trust and credibility before tances have also helped domestic banks attempting to sponsor a major research project foster links with banks in high-income or cooperative agenda (Kuznetsov 2006). countries. In turn, such links have fostered technology transfers as banks in high-income Remittances can promote technology countries have helped local partners to up- diffusion by making investments grade their systems to comply with the anti- more affordable money-laundering, antiterrorism, and know- Remittances to developing countries have your-customer regulations in developed grown steadily in recent years, reaching $207 countries. 126 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S A summary index of trends in the cantly, resulting in a clear negative relationship exposure of developing countries between the observed increase in exposure to foreign technologies and incomes (table 3.5). to external technology This is particularly encouraging for low- The preceding paragraphs have argued that de- income countries, as the gains from such expo- veloping countries gain access to foreign tech- sure tend to be nonlinear and enduring nology through trade, FDI, and the diaspora (Lumenga-Neso, Olarreaga, and Schiff 2005). and that these links have been increasing over For middle-income countries and South Asia, time. This section reports on the results of an however, this result suggests that many coun- effort to summarize these trends by applying tries (notably those in South Asia) may be principal components analysis to five data se- missing out on the potential benefits to be ries covering trade and FDI following the same achieved from increased openness. basic methodology as used in chapter 2 to cre- ate the index of technological achievement.29 The index shows that the relationship be- Nurturing technological tween income levels and exposure to external adaptive capacity technology is relatively weak across countries. Even though the average exposure is higher O penness to trade, FDI, and international communication through the diaspora, other networks, and various media all serve to as one moves from low-income to upper- middle-income developing countries, substan- expose a country to technologies and applica- tial variation is apparent across countries. This tions of technologies that may not have been variation partly reflects issues of country size exploited domestically. Exposure does not, (smaller countries tend to be more open than however, guarantee that these new technolo- larger countries), but it also stems from varying gies will spread and grow within the domestic degrees of specialization among countries. economy. Too often technologically sophisti- The index also shows that many countries cated processes or products are limited to a few have increased their exposure to tech- major centers or foreign-owned enclaves. How nology during the 1990s (figure 3.9). Of the far these technologies diffuse within a country developing countries for which data are avail- is determined by its technological adaptive ca- able, 17 experienced a reduction in exposure pacity, that is, the quality of its labor force and to foreign technologies over the 1990s and 70 the business environment (including access to saw their exposure rise. The average percent- finance) in which firms operate and are able age increase was highest in low-income and (or unable) to start up, expand, and reap the fi- in upper-middle-income countries, with the in- nancial rewards of their new-to-the-market in- crease among lower-middle-income countries novations. In the following sections we explore actually being below that observed among recent trends in technological adaptive capac- high-income countries. These average results ity among developing countries and the roles reflect a mix of strong increases in excess of firms, governments, and individuals play in 100 percent in a number of countries and less creating and supporting that capacity. spectacular increases in others. Governance and the business Much of the variation is attributable to strong increases in the degree of openness climate A stable and predictable economic environ- among the transition economies. The average ment reduces the risk that returns to invest- improvement in the index of exposure to for- ments in technology and innovative business eign technology for the countries of Europe and activities will be lost to conflict or widely vari- Central Asia was 80 percent. Excluding these able inflation and exchange rates. A stable countries from the sample lowers the average regulatory environment that facilitates the increase in middle-income countries signifi- conduct of business by enforcing property 127 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 3.9 Most developing countries have increased their exposure to external technology Exposure to external technology Index 0.25 0.20 0.15 0.10 0.05 0 High-income Upper-middle-income Lower-middle-income Low-income countries countries countries countries Changes in exposure (2000s versus 1990s) Percent change in index 200 150 100 50 0 Ϫ50 Ϫ100 High-income Upper-middle-income Lower-middle-income Low-income countries countries countries countries Source: World Bank. rights, by limiting corruption, and by not im- conflict, as measured by the International posing onerous requirements that make the Crisis Behavior Project, has declined signifi- creation or expansion of firms or their cantly (figure 3.10). The decline has been most adoption of new technologies unnecessarily pronounced in Sub-Saharan Africa, where the difficult also contributes to an economy’s tech- total number of countries in conflict declined nological adaptive capacity. from a peak of 10 in 1998 to only 2 in 2004. Among its many benefits, the cessation of Political and macroeconomic stability conflict can provide an environment that is have improved countries’ ability to more conducive to both private and public exploit technology sector investments in technology. For example, Over the past 15 years, the number of coun- 12 years after the end of hostilities, the gov- tries involved in international or domestic ernment of Rwanda launched an ambitious 128 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S Table 3.5 Increases in exposure to external investment. High government deficits and debt technologies index, 1990s to 2000s also increase uncertainty, especially when (excluding Europe combined with a rigid exchange rate regime, a All countries and Central Asia) combination that increases the likelihood of an Regions (percent change) abrupt revaluation that would further cloud East Asia and the Pacific 13.4 expected future returns. The median inflation Europe and Central Asia 83.7 Latin America and the rate in developing countries fell from 19 per- Caribbean 33.4 cent in the early 1990s to 4 to 6 percent during Middle-East and North Africa 37.8 the first half of this decade, exchange rate South Asia 13.7 Sub-Saharan Africa 33.4 volatility is down, and government deficits have declined across the board and are now Income groups High-income countries 27.7 27.7 below 3 percent of GDP in every developing Upper-middle-income countries 45.1 24.4 region except South Asia. Moreover, the accel- Lower-middle-income countries 36.2 31.7 eration of per capita income growth over the Low-income countries 33.5 33.5 past 15 years, which has been most marked Source: World Bank. Note: Values are unweighted averages of country-specific over the past 6 years, has improved the overall changes. affordability of technology (table 3.6). program of technological capacity building A weak business environment and poor (Watkins and Verma 2007). governance can impair technological Improved macroeconomic stability and progress growth in developing countries has also con- Regulatory restrictions that impair the econ- tributed to an environment that is more omy’s flexibility may limit the absorption of friendly toward technological investment.30 technology. Restrictions on labor mobility and High and variable inflation and high exchange rules that constrain firms’ ability to reallocate rate volatility increase the risk involved in workers within the firm can be important investments in technology and increase the barriers to the adoption of new technologies returns to financial manipulation relative to (Parente and Prescott 1994). For example, Figure 3.10 Number of countries in conflict worldwide Number of countries 35 30 25 20 15 10 5 0 0 5 80 5 90 95 00 05 60 65 7 7 8 19 19 19 19 19 19 20 20 19 19 High-income countries Upper-middle-income countries Lower-middle-income countries Low-income countries Source: International Crisis Behavior database. http://www.cidcn.umd.edu.icb. 129 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table 3.6 Macroeconomic stability has improved in developing countries Median inflation rate a Real effective exchange rate volatility b 1990–94 2002–06 Difference 1990–94 2002–06 Difference World 11.1 3.6 Ϫ7.5 3.7 1.4 2.3 High-income countries 3.4 2.1 Ϫ1.3 1.6 0.8 0.8 Upper-middle-income countries 19.2 4.5 Ϫ14.7 2.8 1.4 1.4 Lower-middle-income countries 16.3 4.7 Ϫ11.6 6.5 1.2 5.3 Low-income countries 9.2 4.0 Ϫ5.2 3.9 2.0 1.9 Developing countries 18.8 4.2 Ϫ14.5 4.5 1.5 3.0 East Asia and the Pacific 7.1 3.4 Ϫ3.7 1.3 1.2 0.1 Europe and Central Asia 326.8 4.3 Ϫ322.5 10.6 1.2 9.4 Latin America and the Caribbean 17.1 5.5 Ϫ11.6 2.9 1.3 1.6 Middle East and North Africa 8.9 3.7 Ϫ5.2 1.9 1.2 0.7 South Asia 9.8 5.4 Ϫ4.4 1.4 1.1 0.3 Sub-Saharan Africa 9.2 4.6 Ϫ4.6 3.9 2.1 1.8 General government balance c General government debt d 1990–94 2002–06 Difference 1990–94 2002–06 Difference World Ϫ5.0 Ϫ1.5 3.5 62.6 64.1 1.5 High-income countries Ϫ4.3 0.8 5.1 58.7 55.6 Ϫ3.0 Upper-middle-income countries, excluding ECA Ϫ2.3 Ϫ2.1 0.2 55.1 74.5 19.4 Lower-middle-income countries, excluding ECA Ϫ3.8 Ϫ2.9 0.9 64.3 57.5 Ϫ6.8 Low-income countries, excluding ECA Ϫ5.4 Ϫ1.9 3.5 97.9 106.5 8.7 Developing countries, excluding ECA Ϫ4.1 Ϫ2.2 1.9 73.3 78.7 5.4 East Asia and the Pacific Ϫ2.0 Ϫ2.1 Ϫ0.1 45.6 57.0 11.4 Europe and Central Asia Ϫ9.4 Ϫ1.9 7.5 38.9 37.2 Ϫ1.7 Latin America and the Caribbean Ϫ2.2 Ϫ2.8 Ϫ0.6 67.5 69.7 2.2 Middle East and North Africa Ϫ6.6 Ϫ2.8 3.9 71.6 71.3 Ϫ0.3 South Asia Ϫ7.7 Ϫ6.1 1.5 78.2 76.3 Ϫ1.9 Sub-Saharan Africa Ϫ5.3 Ϫ1.4 3.9 88.6 97.6 8.9 GDP per capita growth e 1985–94 1995–2006 Difference World 1.8 2.5 0.7 High-income countries 2.1 2.5 0.4 Upper-middle-income countries, excluding ECA 2.9 2.1 Ϫ0.8 Lower-middle-income countries, excluding ECA 1.1 2.1 1.0 Low-income countries, excluding ECA Ϫ0.5 1.6 2.1 Developing countries, excluding ECA 2.0 2.0 0.0 East Asia and the Pacific 3.7 2.5 Ϫ1.1 Europe and Central Asia Ϫ2.4 4.9 7.3 Latin America and the Caribbean 2.1 1.7 Ϫ0.5 Middle East and North Africa 3.2 2.1 Ϫ1.1 South Asia 2.6 3.3 0.7 Sub-Saharan Africa 0.6 2.6 2.0 Source: DataStream, International Monetary Fund, JP Morgan, World Bank. Note: ECA ϭ Europe and Central Asia. a. Calculated as the mean over each indicated period of the median monthly (year over year) Consumer price index infla- tion rates of the countries in each grouping. b. Calculated as the period average of the absolute value of the month-over-month percent change of the real effective ex- change rate of countries in each grouping. c. Calculated as the period average of the simple mean across countries of the central government budget deficit as re- ported by the International Monetary Fund. d. Calculated as the period average of the simple mean across countries of the government debt as reported to the World Bank (for low- and middle-income countries and as per the IMF for high-income countries). e. Calculated as the period average of the simple mean across countries of the growth in GDP per capita. 130 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S stringent labor market regulations in Brazil someone in an OECD country. Minimum undermine productivity and technical effi- capital requirements are also high compared ciency (World Bank 2005), and the removal of with income and likely limit the size of formal labor market regulations that result in invol- small and medium enterprise sectors, particu- untary overstaffing would increase labor pro- larly in the Middle East and North Africa and ductivity by 7 percent in India (World Bank in Sub-Saharan Africa, where they represent 2004b). Similarly, restrictions on firm exit and more than two years of average earnings. entry can impede technological progress by Ensuring timely and efficient exit by failed propping up inefficient firms and limiting the businesses also promotes technological expansion and creation of innovative firms.31 progress by freeing unemployed and underem- Rules and regulations governing firm start- ployed capital and workers for more efficient up can be particularly important, because they uses. Developing countries, on average, require have the potential to prevent a new technol- much more time to resolve insolvencies (rang- ogy or new-to-the-market product or process ing from 2.7 years for East Asia and the Pacific from seeing the light of day. The World Bank’s to 5.0 years for South Asia) than OECD coun- indicators on doing business suggest substan- tries (which require an average of 1.3 years). In tial room for improvement in most developing addition, the amount recovered averages less regions. On average, an entrepreneur seeking than 30 cents on the dollar in all developing re- to begin a new business must undertake more gions (and only 20 cents in South Asia and than 9 separate procedures, which can take al- 17 cents in Sub-Saharan Africa), compared with most 50 days to complete (table 3.7). Among 74 cents on the dollar in OECD countries.32 high-income countries that belong to the The quality of regulation, including its en- Organisation for Economic Co-operation and forcement, and of the business legal environ- Development (OECD), the equivalent figures ment are critical determinants of the capacity are 6 procedures and 17 days. Moreover, in of new and innovative firms to grow and ex- developing countries the associated fees are pand. For example, the ability of such firms particularly onerous given income levels, con- to finance their initial operations or conduct suming more than an amount equivalent to arms-length operations, both of which are 1.5 years worth of per capita income for a per- crucial for technologically advanced compa- son living in South Asia, compared with nies that require a large customer base to 5 days worth of the per capita income of exploit economies of scale, depend on the Table 3.7 The regulatory burden is heavier in developing countries than in the OECD Procedures Duration Cost Minimum capital requirements (number) (days) (% of GNI per capita) (% of GNI per capita) East Asia and the Pacific 8.2 46 43 60 Europe and Central Asia 9.4 32 14 54 Latin America and the Caribbean 10.2 73 48 18 Middle East and North Africa 10.3 41 75 745 South Asia 7.9 62 163 1 Sub-Saharan Africa 11.1 33 47 210 Developing-country average 9.5 47.8 65 181 OECD countries 6.2 16.6 5 36 Memo: Ratio of developing-country average to OECD average 1.5 2.9 12.2 5.0 Source: World Bank; Doing Business. http://www.doingbusiness.org Notes: Procedures required to register a firm, average time spent during each procedure, offical cost of each procedure, and minimum capital required as a percent of income per capita; GNI ϭ gross national income. 131 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 3.11 Efficiency of contract Figure 3.12 Developing country enforcement governance scores relative to OECD Number of procedures Days average 45 1,200 Political stability 40 1,000 35 Government effectiveness 30 800 Regulatory 25 quality 600 20 Control of corruption 15 400 10 Rule of law 200 5 Voice and 0 0 accountability be nd c d ia 40 45 50 55 60 Su As d D Af nd ric n Pa an n Af ara EC As ib a tra e a a th t a b- ia a an C uro c ric E ifi ar a e ia h O th or as Index, OECD ϭ 100 C ric en p Sa th s La Sou A N E l e e th Am st e dl Ea id tin M Source: Kaufmann, Kraay, and Mastruzzi 2007. Procedures (left axis) Time (right axis) associated with improvements in process Sources: World Bank; Doing Business. http://www.doingbusiness.org. technology, particularly in the delivery of gov- ernment and regulated services. For example, Kaufmann, Kraay, and Mastruzzi (2007) estimate that an improvement of one standard system’s ability to enforce contracts, establish deviation in the summary governance indica- property rights, and enforce court decisions in tor is associated, in the long term, with a two- a timely and cost-effective manner. thirds reduction in infant mortality and a Although the number of procedures re- tripling of incomes. quired to enforce a court decision in the case Surveys suggest that developing countries of a contract dispute in developing countries is lag behind high-income countries on a wide significantly higher than in OECD countries, range of governance indicators (figure 3.12). the time taken to reach a decision is not too For example, government effectiveness and much greater (with the notable exception of regulatory quality are typically considered to South Asia), generally less than 25 days, com- be at half of OECD levels, with indicators for pared with 13 days in OECD countries (figure corruption, rule of law, and voice and ac- 3.11). However, the time required to enforce countability being even lower. legal decisions approaches two years in four of These aggregate results hide a certain six regions. This seriously affects firms’ (and amount of variation across countries and consumers’) ability to effect arms-length trans- regions (figure 3.13). Governance in the actions with confidence, and is therefore an Caribbean and in Eastern Europe and the important inhibitor to the growth of techno- Baltic countries appears to be much stronger logically sophisticated firms. (more than 70 percent of the OECD level) Corruption can also prevent entrepreneurs than in the rest of the developing world, while from making investments in technology and countries in the former Soviet Union and Sub- expanding their businesses in a manner that Saharan Africa have the lowest ratings, only 34 helps extend the penetration of technologies and 28 percent of OECD levels, respectively. into the economy, while increasing the relative In contrast to other indicators of perfor- return to activities aimed at influencing policy mance, such as inflation and openness, there is makers. Moreover, better governance is also little evidence that developing countries have 132 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S quality of governance in many developing Figure 3.13 Regional averages of six countries, an improvement that would en- governance indicators courage technological progress. OECD Basic technological literacy Caribbean While the policy environment is critical to the Eastern Europe and Baltic absorption of technology, technological countries progress also requires a literate workforce. East Asia The process by which external technologies Developing- are absorbed, adapted, and integrated into an country average economy is not a mechanical one, but one that Latin America depends on the quality, quantity, and distribu- Middle East and tion of human capital, that is, on the techno- North Africa logical competencies and the health of the South Asia people that use and implement the technology. For this reason, efforts to increase the techno- Sub-Saharan Africa logical competency, knowledge, and under- Former Share of OECD average standing of populations, firms, and govern- Soviet Union Percentile rank (1–100) ments lie at the heart of the World Bank’s 0 20 40 60 80 100 technology agenda. Especially among poor Sources: World Bank; Doing Business. countries and in rural areas, existing deficits in http://www.doingbusiness.org. terms of basic skills are a binding obstacle to technological progress and income growth. markedly improved their governance over the Low incomes and poor health impair skill past decade. Despite individual country im- formation for technological progress provements and marked gains in the regula- Low income and poor health are perhaps tory environment in Europe and Central Asia, among the most basic constraints to techno- on average, the quality of governance around logical progress. Even if profitable investments the world has not improved much over the in technology are available, inadequate income past decade (see the World Bank’s Governance limits the ability to generate resources for Matters series). For each country that has investment. At the level of the economy, low done well, one has experienced deterioration income is both a cause and an effect of low lev- in its governance indicators. Two countries els of human capital, limited funds allocated to that have experienced notable deterioration research, thin financial markets, often poor are Belarus and the República Bolivariana de governance, and sometimes violence and Venezuela. Many countries have not experi- macroeconomic instability, all of which limit enced any significant change in either direc- the ability to absorb technological innovations. tion. On the positive side, the Governance Recent developments in relation to income Matters series shows that where countries are levels are heartening. Growth rates of GDP committed to reform, improvements can per capita have picked up throughout the take place relatively quickly. For example, developing world over the past 15 years during the relatively brief period of 2002–06, (figure 3.14). The number of people living in Kenya, Liberia, and Ukraine made significant absolute poverty has declined by more than advances in voice and accountability, while 250 million, and their share in the population Algeria and Angola made substantial progress of the developing world is expected to fall in political stability. Thus the potential exists from 18 percent in 2004 to around 11 percent for a rapid, substantial improvement in the by 2015 (chapter 1). 133 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 In Sub-Saharan Africa, the combination of Figure 3.14 Per capita incomes have incomes that are still extremely low and the accelerated in recent years ravages of HIV/AIDS are more problematic. Average growth in annual per capita incomes The failure to control HIV/AIDS is itself an 6 2001–06 example of poor dissemination of technology 1990s 5 1980s and problems of affordability, as both the 4 1970s know-how to limit the spread of the disease 3 1960s and to control its health effects are well 2 known, even though implementation strate- gies are controversial and tend to be country 1 specific. Some countries, such as Uganda, have 0 succeeded in reducing HIV infection rates. Ϫ1 Other countries in western Africa have suc- Ϫ2 ceeded in limiting its spread. Still others, no- Low-income Middle-income Sub-Saharan countries countries Africa tably Botswana, are doing better at treating those infected than in preventing new infec- Source: World Bank. tion. In too many countries, however, the epidemic continues to grow more or less Similarly, welcome developments have uncontrolled, with widespread societal conse- taken place in basic health. Life expectancy at quences (World Bank 2007b). Estimates sug- birth has reached 70 years in middle-income gest that in Burkina Faso, Rwanda, and countries and continues to converge to still- Uganda, HIV/AIDS is likely to increase the rising high-income country levels (figure 3.15). percentage of people living in extreme poverty Among low-income countries, life expectancy by as much as 6 percentage points between is also converging with high-income countries. 2000 and 2015 (UNDP 2003). In Kenya, Excluding Sub-Saharan Africa, where life ex- HIV/AIDS may reduce GDP per adult by 11 pectancy has been declining because of HIV/ percent by 2040 compared with what it would AIDS, life expectancy in low-income countries have been in the absence of HIV/AIDS (Bell, increased from 59 years in 1990 to 64 years in Bruhns, and Gersbach 2006). In addition to 2005, suggesting that in much of the world, the incalculable human costs implied, contin- poor health should be decreasing as a factor ued high death rates in the adult population impeding technological progress. will have further negative implications for the ability of these countries to acquire and to apply technology, both because the experience Figure 3.15 Except in Sub-Saharan Africa, life expectancy is improving and technological competencies of the adults expected to die will be lost and because the Life expectancy at birth (years) educational attainment and literacy of their 80 Lower-middle- High-income countries income countries children and dependents will be impaired 70 (Bell, Devarajan, and Gersbach 2004). South Asia 60 Illiteracy is declining, but still blocks Upper-middle-income countries Low-income countries’ ability to absorb new countries 50 technologies Sub-Saharan Africa The level of human capital is a major determi- 40 nant of an economy’s ability to adapt and ab- 60 65 70 75 80 85 90 5 0 5 sorb both sophisticated and even more basic 9 0 0 19 19 19 19 19 19 19 19 20 20 Source: World Development Indicators. technologies.33 In both high-income (Eaton and Kortum 1996) and developing countries 134 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S (Caselli and Coleman 2001), the extent to primary school completion rates) and more which a given technology is used within a sophisticated indicators, such as tertiary edu- country depends importantly on the educa- cation enrollment rates (table 3.8). Over the tional attainment of the population, both be- past 15 years, literacy rates have increased cause such skills help individuals learn how to throughout the developing world, with the make effective use of a new-to-the-firm or farm biggest increases recorded among low-income technique, and because they increase the likeli- countries, particularly in South Asia. Reported hood that firms will learn of new innovations literacy rates in Europe and Central Asia rival beyond the scope of their local communities. those in high-income countries, while in East Although the gap between the educational Asia and the Pacific and Latin America and attainment of individuals living in developing the Caribbean, literacy rates are at or close to countries and those in high-income countries 90 percent. Elsewhere literacy lags consider- remains wide, it is closing, both in terms ably, with only 73 percent of the population in of the most basic indicators (literacy and the Middle East and North Africa being able to Table 3.8 Educational attainment indicators Adult literacy rate Female literacy rate Expected years of schooling 1990–2005 2005a 1990–2005 2005a 2001–05 2005 (% of population (% of female (% point aged 15 (% point population aged (years of Regions change) and older) change) 15 and older) (% change) schooling) East Asia and the Pacific 10.7 91 14.9 87 1.9 11.2 Europe and Central Asia 1.3 97 1.8 96 0.8 12.7 Latin America and the Caribbean 2.3 90 2.6 89 0.5 13.1 Middle East and North Africa 14.7 73 16.5 63 2.1 11.7 South Asia 11.6 58 12.8 46 4.0 9.7 Sub-Saharan Africa 5.1 59 5.2 50 3.5 8.0 Income groups World 6.0 82 7.3 77 2.0 10.9 High income 0.3 99 0.3 98 0.4 15.8 Upper middle income 0.8 93 1.9 92 0.5 13.3 Lower middle income 9.2 89 12.0 85 2.0 11.5 Low income 9.3 61 10.1 50 3.5 9.0 Primary completion rate Secondary completion rate Tertiary completion rate 1991–2005 2005 1990–2000 2000 1990–2000 2000 (% of population (% point (% of relevant (% point (% of population (% point aged 15 Regions change) age group) change) aged 15 and older) change) and older) East Asia and the Pacific Ϫ1.7 97.7 1.5 13.7 0.8 2.5 Europe and Central Asia 2.2 94.9 0.1 13.5 1.6 5.5 Latin America and the Caribbean 16.9 98.5 1.1 8.7 1.2 4.9 Middle East and North Africa 13.7 90.7 2.1 10.0 1.4 3.4 South Asia 18.1 83.5 0.5 7.0 0.5 2.0 Sub-Saharan Africa 11.5 60.8 0.5 2.3 0.4 1.0 Income groups World n.a. 87.6 0.4 11.9 1.0 4.9 High income n.a. 97.4 Ϫ0.7 18.6 2.9 13.3 Upper middle-income 10.3 98.5 0.7 12.4 1.4 4.9 Lower middle-income 2.7 96.6 1.4 12.4 0.9 2.9 Low income 17.0 75.9 0.5 6.1 0.4 1.8 Source: World Development Indicators. a. Actual reference year varies by country. 135 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 read and write and about 60 percent in South Table 3.9 Relatively high youth literacy Asia and in Sub-Saharan Africa. Moreover, rates there are concerns about the comparability of Youth literacy rate these data, as some low-income countries re- 1990–2005 2005a portedly define literacy as the ability to read and write one’s own name. (% of Divergence in the literacy rates for women (% point population explain much of the disparity. For example, in Regions change) age 15–24) East Asia and the Pacific 3.43 98 South Asia fewer than half of women age 15 Europe and Central Asia 1.67 99 and older are literate. Women in the Middle Latin America and the Caribbean 2.29 96 East and North Africa and Sub-Saharan Africa Middle East and North Africa 12.23 88 South Asia 13.72 73 fare somewhat better, with literacy rates of Sub-Saharan Africa 5.42 70 63 and 50 percent, respectively. Although Income groups the technological consequences of such wide- World 4.16 88 High-income countries 0.23 99 spread illiteracy are difficult to quantify, illiter- Upper-middle-income countries 1.82 98 ate mothers are much less successful in assist- Lower-middle-income countries 3.68 96 ing their children to learn (Behrman and others Low-income countries 10.41 73 1999), have much more difficulty in absorbing Source: World Bank; World Development Indicators. new techniques and instructions that are trans- a. Actual reference year varies by country. mitted in written form, and are likely to be less effective workers than their better educated Republic. In particular, the gap between peers. Indeed, female illiteracy and the result- school completion rates for girls and boys has ing relative ignorance of best practices in child narrowed significantly. Partly as a conse- rearing may be a major causal factor in poor quence, youth literacy rates are much higher child health care and poor female labor force than adult literacy rates in South Asia and outcomes (Rosenzweig and Wolpin 1994). Sub-Saharan Africa, which over time should be reflected in better literacy scores for women Rising primary school completion rates and improved transmission of knowledge and should drive further improvements in technology to future generations (table 3.9). adult literacy Of course, progress in providing effective The rise in literacy rates is due in no small part basic education is a necessary precursor of to increased and longer participation in for- more formal secondary and tertiary educa- mal education. Primary school completion tion. Nevertheless, the more advanced techni- rates approach 100 percent in about half of cal and problem-solving skills that are taught the developing regions and have increased at the basic level can significantly increase stu- substantially among poorer regions, notably dents’ capacity to learn to work with, adapt, South Asia and Sub-Saharan Africa. Although and maintain more technologically advanced reflective of the average literacy in the geo- goods. Indeed, the main obstacle to deepening graphical region, these numbers hide impor- the use of a given technique or process in a tant variations across countries. Thus the low country is frequently a lack of sufficient num- score for South Asia reflects mainly low liter- bers of individuals trained to maintain and acy in India, and it masks the fact that some install systems. For example, in Rwanda a 95 percent of Sri Lankan youth can read and shortage of plumbers and sheet metal workers write. Similarly, China’s relatively high liter- has been identified as a principal factor con- acy rates and its large weight in East Asia straining the deployment of the simple kind aggregate mask the less than 90 percent liter- of rain-harvesting technologies that have acy rates of less populous countries such as succeeded in increasing the supply of sani- Cambodia and the Lao People’s Democratic tary drinking water in neighboring countries 136 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S (Watkins and Verma 2007). While nearly 19per- Figure 3.16 Educational expenditures have cent of the population completes secondary risen in some regions school in high-income countries, secondary school attainment rates range between 10 and Public expenditures as a percent of GDP 6.0 14 percent in East Asia and the Pacific, Europe High-income countries and Central Asia, and the Middle East and 5.5 Upper-middle- North Africa, but are below 9 percent in Latin 5.0 income countries America and the Caribbean, South Asia, and 4.5 Sub-Saharan Africa (table 3.8). Between 1990 4.0 and 2000, secondary completion rates more 3.5 than doubled in the Middle East and North 3.0 Africa, East Asia and the Pacific, and Latin Lower-middle- Low-income 2.5 income countries countries America and the Caribbean, but remain low. In 2.0 contrast, improvements have been much less 1970 1975 1980 1985 1990 1995 2000 marked in South Asia and Sub-Saharan Africa, Sources: UNESCO Institute of Statistics; World Bank. and no appreciable gain was apparent in Eu- rope and Central Asia. By income grouping, the strongest gain in the secondary completion rate is reported by the lower-middle-income coun- on education among lower-middle-income tries with an increase of 1.4 percentage points countries averaged about 3.3 percent of during 1990–2000, compared with half as GDP during the 1970s and 1980s and rose much or less of an improvement among other to a fairly steady 4.3 percent during 1990 income groupings. through 2000 (figure 3.16). Among low- This same general pattern is observed for income countries, the share of public outlays tertiary-level students. In East Asia and the rose by about half a percentage point to an Pacific, South Asia, and Sub-Saharan Africa, average of 3.3 percent of GDP during 2.5 percent or less of the population aged 1990–2000, up from an average of 2.9 percent 15 years or older has completed tertiary edu- during 1980 through 1985. These shares cation. Europe and Central Asia and Latin compare with government expenditures on America and the Caribbean have almost double education of close to 5.3 percent of GDP in the number of tertiary-level graduates, while high-income countries, down from a peak of the Middle East and North Africa falls in be- just over 5.6 percent during the mid-1970s.34 tween these two groups of regions (table 3.8). While educational attainment rates and ex- The share of secondary graduates who go on penditure data are available for a fairly wide to tertiary studies is relatively high in Latin number of countries, the data are silent on the America and the Caribbean, 60 percent, com- quality of the education (or knowledge) re- pared with 70 percent in high-income coun- ceived, and it is the quality of education that tries. However, the share of university determines the effectiveness with which indi- students following a scientific as opposed to a viduals can absorb and exploit technology. social science curriculum is relatively low Here significant concerns have been raised, (Maloney 2006). Elsewhere, the ratio is 42 per- particularly for poorer countries where the cent or lower, with only 18 percent of sec- quality of educators and limited resources sap ondary graduates going on to the tertiary level the value of time spent in school. This suggests in East Asia and the Pacific. that the education deficits in developing re- This performance in educational attainment gions could be larger than indicated by na- across levels of schooling is largely consistent tional indicators, which, in turn, implies that with patterns of public expenditures dedicated the expansion of knowledge attained (and the to education. For example, public expenditures capacity to adopt and adapt technological 137 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Figure 3.17 Many developing country students fail to meet literacy standards Fourth grade reading performance on OECD test Sixth grade reading performance on South African regional test Percent Percent 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Turkey Argentina Colombia Morocco South Africa Uganda Namibia Malawi Percent ever enrolled Percent enrolled and achieved minimal literacy Source: World Bank 2007d. knowledge) is not necessarily rising in accor- toward their most productive use (investments) dance with higher educational attainment. is an important determinant of its technological The availability of international test scores adaptive capacity. across countries is very limited outside of high-incomes countries, but some data under- Limited financial intermediation restricts score these concerns. For example, in a num- technology diffusion ber of middle-income countries, the majority Neither the banking system, nor equity mar- of primary school students fail to meet OECD kets, nor private sector bond markets in devel- literacy standards. In Sub-Saharan Africa, de- oping countries have channeled savings into spite enrollment rates of close to 100 percent, the private sector to the same extent as they in some countries fewer than half of grade six have in high-income countries (table 3.10). As students are deemed literate (figure 3.17). a result, the arm’s-length channels through Although based primarily on data from high- which private savings can be directed toward income countries, research suggests that innovative firms are limited. While banks in teacher quality is a key determinant of differ- high-income countries play a significant role in ences in student outcomes (Hanushek and relaying private savings to investors (private- Woessmann 2007). sector debt is equivalent to some 50 percent of GDP in high-income countries), this kind of in- Financing innovative firms termediation occurs at about half that level in So far, the discussion has described how the pol- middle-income countries and almost not at all icy environment and human capital can pro- in low-income countries. On a more encourag- mote technology diffusion. At the same time, ing note, the run-up in international investors’ and as indicated in chapter 2, affordability, both appetite for risk has increased market capital- at the level of the firm and of the consumer, can ization in developing countries by significant be a major impediment to the diffusion of tech- margins since 2000 (with the exception of East nology within a country. In this regard, the suc- Asia, where valuations declined). Valuation cess with which an economy’s financial system ratios are now much closer to those observed succeeds in channeling resources (savings) in high-income countries. 138 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S Table 3.10 Weak financial intermediation hinders technology in developing countries % change % change 1990 2000 2005 2005/1990 1990 2000 2005 2005/1990 Financial system deposits Stock market capitalization (% GDP) (% GDP) Regions East Asia and the Pacific 40.9 41.7 45.6 11.5 38.7 44.1 51.3 32.5 Europe and Central Asia 23.8 22.8 31.2 31.0 8.5 13.8 19.7 130.8 Latin America and the Caribbean 31.1 39.9 39.8 28.1 11.7 28.2 46.4 298.3 Middle East and North Africa 46.5 47.4 59.8 28.7 16.0 26.1 63.8 298.3 South Asia 22.5 33.3 43.7 94.0 6.7 13.4 26.1 290.0 Sub-Saharan Africa 18.5 19.9 24.4 31.4 31.0 27.0 34.9 12.4 Income groups High-income countries 76.0 87.0 91.4 20.4 45.1 105.0 112.2 148.7 Upper-middle-income countries 34.3 43.6 45.2 31.8 37.7 36.5 50.2 33.4 Lower-middle-income countries 36.0 34.3 39.4 9.7 13.4 20.4 34.3 156.7 Low-income countries 16.7 17.4 21.8 30.7 7.6 10.8 22.3 194.7 Private-sector credit Private-sector debt (% GDP) (% GDP) Regions East Asia and the Pacific 30.3 36.7 44.9 48.2 — 37.5 31.0 .. Europe and Central Asia 22.3 18.2 27.9 25.3 — 12.7 12.2 . Latin America and the Caribbean 28.6 40.6 32.1 12.3 — 27.2 23.3 .. Middle East and North Africa 35.3 40.5 46.1 30.7 — — — .. South Asia 16.2 21.6 34.1 110.4 — 1.9 4.0 .. Sub-Saharan Africa 17.4 16.3 18.2 4.4 — 20.1 30.2 .. Income groups High-income countries 81.1 94.2 108.2 33.3 — 47.9 50.0 .. Upper-middle-income countries 32.8 42.5 40.5 23.6 — 27.5 26.1 .. Lower-middle-income countries 27.3 29.3 31.9 16.7 — 27.7 23.4 .. Low-income countries 14.9 13.4 16.4 9.7 — 1.9 4.0 .. Source: Beck, Demirgüç-Kunt, and Levine 2000. Financial Structure Dataset updated March 20, 2007. For Private Sector Debt the source is World Bank, Financial Sector Development Indicators. http://www.financial-indicators.org (February 2007). Note: — ϭ not available; .. ϭ undefined. Barriers to the finance of high-risk entrepreneurs are less likely to obtain financ- activities severely impede the spread ing than experienced entrepreneurs operating of technology with proven techniques. Coupled with thin Although weak intermediation is a general markets, this translates into higher capital problem in developing countries, the problem costs for innovative firms in developing coun- for innovative firms or companies seeking to tries than for those in high-income countries, a employ an untested new-to-the-market tech- fact that is reflected in lower R&D intensities nique or product is more severe. Innovation (Lederman and Maloney 2006) and a reduced can involve high risk, and traditional sources likelihood that their financing needs are met.35 of capital—banks, stock exchanges, and Innovative firms in developing countries bond markets—often lack the technical exper- are also less likely to have access to equity tise to evaluate innovative investments. Thus financing than do their counterparts in high- in the absence of demonstrated cash flows income countries because of strict listing or enforceable collateral, innovative firms or requirements imposed by the regulators of 139 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 emerging-market exchanges36 (Pfeil 2000). and national organizations, including Less stringently regulated, so-called new mar- nongovernmental ones, can play a role in pro- kets, modeled after the NASDAQ in the United moting the dissemination of knowledge States, have been developed to fill the void. within the domestic economy. In addition to Many of these markets help investors by pro- the formal education system, less formal viding some, albeit less rigorous, due diligence continuing education—notably, outreach pro- of listed firms and by offering risk-pooling grams and R&D programs that focus on services (offerings of bundled shares that reduce adapting technologies to local conditions— investors’ exposure to any one firm). Such cap- have a central role to play. ital pool companies allow listing firms to access equity finance in amounts that are too large for R&D efforts to adapt existing technology angel investors to provide, but are too small for to local conditions are expanding institutional investors. However, the full Domestic R&D capacity is critical in promise of such markets has yet to be felt, in determining an economy’s capacity both to part because many of them have been obliged to generate new technologies and to absorb tech- maintain relatively strict listing requirements to nologies from abroad. Foreign technologies attract foreign investors (Yoo 2007). frequently need to be modified so that they are Increasingly, venture capitalists and “busi- suitable for domestic circumstances. For ex- ness angels” are playing a role in financing ample, equipment and processes may need to new technologically sophisticated firms in be adapted to differences in the quality of in- developing economies.37 These investors tend puts and in the relative abundance of labor to have more technological know-how than and capital, and a stock of researchers is often do traditional lenders and to be better able to necessary to understand and evaluate ad- judge the potential profitability of new ven- vanced technology (Cohen and Levinthal tures. Often the transfer of business and mar- 1989). Building up R&D capacity facilitates keting expertise is as important as the infusion the imitation and adaption of foreign tech- of capital in determining the difference be- nologies and improves the extent to which pos- tween success and failure for young firms itive spillovers from FDI and trade accrue to (Avnimelech and Teubal 2004; Mayer 2003). the rest of the economy (Fagerberg 1988; Ki- Even though empirical evidence is still scarce, noshita 2000). Moreover, countries tend to ac- this activity appears to be translating into quire technology more readily when domestic increased innovation (Pfeil 2000). Western- firms have R&D programs and when public based venture capitalists are increasingly be- research laboratories and universities have rel- coming involved in markets in Asia (China atively close ties to industry (Maskus 2000). and India), Eastern Europe (notably the Czech Available data indicate that most develop- Republic, Hungary, and Russia), and South ing regions have been increasing their R&D Africa. Notwithstanding this increased activ- expenditures relative to GDP (table 3.11).38 ity, Nastas (2007) reports that only 1 in 200 East Asia and the Pacific has experienced a small and medium enterprises in emerging particularly rapid rate of increase in R&D ex- markets is likely to secure venture capital fi- penditures and also has the highest level of nancing, and the ratio is undoubtedly lower such expenditures among those regions for for firms in less-developed countries. which data are available. In contrast with other regions, in Latin America and the Supporting innovative firms with Caribbean, both the number of researchers R&D and outreach and expenditures on R&D have been falling While the process of technological advance or stagnant, reflecting both a reorientation of occurs fundamentally at the firm level, policy away from university-led R&D (Mal- the government, along with international oney 2006) and tighter fiscal policies. 140 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S Table 3.11 R&D intensities have increased R&D expenditure Researchers in R&D 1997–2002 2002 1997–2002 2002 Regions (% point change) (% of GDP) (% change) (per million people) East Asia and the Pacific 0.45 1.06 4.4 545.3 Europe and Central Asia 0.06 0.88 –1.4 2008.7 Latin America and the Caribbean 0.01 0.57 — — Middle East and North Africa — — — — South Asia 0.13 0.77 — — Sub-Saharan Africa — — — — Income groups World 0.12 2.18 — — High-income countries 0.12 2.43 2.6 3750.0 Upper-middle-income countries 0.09 0.71 — — Lower-middle-income countries 0.46 1.01 3.9 499.9 Low-income countries 0.18 0.80 — — Source: World Development Indicators. Note: * Interpolation applied where appropriate; — ϭ not available. While developing countries spend less on Firm-level R&D is most effective R&D than high-income countries, the gap is in promoting technological progress not extreme. Relative to GDP, low-income All R&D can contribute to an economy’s ca- countries spend about one-third as much on pacity to create, adapt, and adopt technology. R&D than high-income countries. One issue Nevertheless, because of the fundamental role with the data is that the coverage of commer- that firms play in diffusing technology cial R&D expenditures is poor in many through the economy, the most productive developing countries, so the figures largely re- R&D tends to be that conducted by firms or flect R&D expenditures by the public sector by public or university laboratories working and universities. As firms in many developing actively with the private sector. Across devel- countries probably focus on adapting foreign oping countries, the share of R&D conducted technology to local conditions, a significant by firms (as opposed to government or portion of this important activity may there- university laboratories) is highest in East Asia fore not be captured. and the Pacific, where it rivals the share in Table 3.12 Private-public sector R&D Sector of performance Sector of funding Higher Higher R&D spending Business Government education Business Government education (% GDP) (share of total) (share of total) World 2.28 High-income countries 2.45 63 13 27 49 34 2.1 Developing countries 0.83 — — East Asia and the Pacific 1.44 62 22 14 54 35 2.3 Europe and Central Asia 0.94 43 29 20 38 54 0.5 Latin America and the Caribbean 0.56 29 27 33 33 37 27 Middle East and North Africa — — — — — — — South Asia 0.73 — — — — — — Sub-Saharan Africa — — — — — — — Source: Gill and Karas 2007. Note: — ϭ not available. 141 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 high-income countries (table 3.12). Note, the diffusion of often simple but important however, that in China, despite rapid techno- technologies. Agricultural outreach programs logical progress, the efficiency of R&D spend- were instrumental to the green revolution, ing is relatively low and the impact of R&D is even though it took much longer than initially impaired because of poor linkages among gov- expected for those programs to bear fruit ernment R&D institutes, businesses, and uni- (World Bank 1998). Difficulties encountered versities (Zeng and Wang 2007). In Europe in other efforts to disseminate technology and Central Asia and in Latin America and the include a lack of skilled personnel to staff Caribbean, academia and the government are the outreach program and the need to earn the responsible for a much higher share of R&D. trust of the local population. Here challenges Moreover, in the latter region coordination include minimizing the risks people run in between R&D carried out by government in- trying a new technology, listening to their ex- stitutions and private firms has been poor, periences, and adapting techniques as a conse- reducing the impact of R&D on productivity quence (World Bank 2007d). Enhancing the growth (de Ferranti and others 2003). role of farmers in agricultural outreach pro- Research on OECD countries suggests that grams and relying more on cooperation be- the more R&D is conducted at the firm level, tween government and the private sector—in the higher the rate of return to public and aca- those areas where private benefits from demic R&D, presumably because having R&D technology transfer can be substantial—may expertise close to the firm increases the likeli- improve both the impact and financial sus- hood of successful adaptation of a technology tainability of outreach efforts. created in government, academic, or even for- eign laboratories (Guellec and Pottelsberge de Direct government policies to la Potterie 2004). Maloney (2006) concludes promote technology that state-funded R&D that is too academic Innovation requires entrepreneurs: people and/or too disconnected from the private sec- who are willing to take risks to invest in un- tor is less effective at promoting technological certain projects and who have the organiza- progress than firm-conducted R&D or state- tional skills required to bring new products to supported R&D that has a strong connection the market. Given the high risks involved, the to business needs. Indeed, the relatively high returns to successful entrepreneurship must share of private sector R&D in East Asia and be high, but the returns to investment in new South Asia may have contributed to the more technology in developing countries can be lim- rapid technological progress in those regions ited, because potential profits may be reduced than in Latin America and the Caribbean and by imitation, because of a lack of coordination Europe and Central Asia. between firms that produce complementary inputs, or because economies of scale and ag- Outreach plays a critical role in bringing glomeration generate threshold effects that technology to the broader population prevent firms from breaking into mature mar- Too often the overall effectiveness of R&D kets (box 3.6). undertaken by government and specialized re- search institutes is reduced because such orga- Government policy can play a central role nizations are divorced from their eventual in helping firms overcome market failures clients and their incentives are poorly aligned The difficulties that these externalities pose for with the ultimate dissemination of their inven- firms in certain sectors and those seeking to tions and adaptations.39 Especially in poor adopt a new-to-market (or even new-to- countries plagued by illiteracy and weak com- the-firm) technology imply that specific munication networks, technology outreach government interventions may be necessary to programs can play a critical role in increasing encourage investment in technology. 142 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S Box 3.6 Principal market failures impeding technological progress in developing countries he nonpatentability of new-to-the-market prod- process in a small market dominated by a preexisting, T ucts and processes. The vast majority of innova- tion that occurs in developing countries involves the large-scale competitor. Economies generated from learning by doing and the productivity boosts gener- adaptation of already discovered techniques and ated by the accumulation of small innovations are products to the domestic market, and such innova- related impediments that imply that start-ups must tion is not patentable. Lack of patent protection endure an initial period of relatively high costs, which facilitates imitation, which may speed diffusion, but in the absence of adequate intermediation, may pre- reduces the returns to the individual or firm intro- vent them from accumulating sufficient experience or ducing the technique or product to the domestic scale to attain adequate levels of profitability. For ex- market. As a result, private entrepreneurs under- ample, Arrow (1962) cites evidence that productivity invest in easily reproduced techniques, even though in the production of airframes is a decreasing function they could have large social benefits. of the total number of airframes of the same type pro- Coordination failures limit investment in technol- duced previously. ogy. Some technologies rely on the availability of Knowledge spillovers tend to be geographically complementary inputs. Coordination failures can bounded within a region where the new economic arise when new industries exhibit scale economies knowledge is created (Audretsch and Feldman 2004). and some of the inputs require geographical proxim- Audretsch and Feldman (1996) find that the propen- ity. For example, producing cut flowers for export sity of innovative activity to cluster geographically requires an adequate electrical grid, irrigation, logis- tends to be greater in industries where new economic tics and transport networks, quarantine and other knowledge plays a more important role as has oc- public health measures, and resources devoted to curred in, for example, Silicon Valley and Bangalore. marketing the country as a dependable supplier Studies also find that access to venture capital in the (Rodrik 2004). However, these services have high United States is heavily skewed by region (Sorenson fixed costs and will not be supplied unless demand is and Stuart 2001). sufficient, creating a vicious circle where demand is Agglomeration effects, whereby firms benefit from not forthcoming because of the lack of supply. The the knowledge and human resource spillovers arising market for training is another example of potential from the geographical proximity of firms in the same coordination failure, as workers will demand train- area of business, may also prevent developing econ- ing only if a demand for trained workers exists, but omy firms from breaking into established markets in the absence of training there is no demand (Glaeser and others 1992). The absence of such effects (Rodriguez-Clare 2005). Perhaps reflecting such represents an important barrier to development in factors, in almost all the successful case studies of Sub-Saharan Africa and in more remote areas of innovation reported in Chandra (2006), government China and India, where lack of physical proximity played an important role by providing infrastructure, both raises trading costs and minimizes the potential marketing, or training support. for benefits from interactions with more rapidly Threshold effects caused by economies of scale in growing areas. many manufacturing sectors prevent entry by firms into global markets or the introduction of a new Source: World Bank. Governments in developing countries have un- technologies that it would not otherwise adopt dertaken a host of direct interventions in because of capital market imperfections. These productive activities to provide demonstration steps have included the following: effects, encourage innovation that otherwise would not occur because imitators reap the • Providing support for industry-specific lion’s share of benefits, resolve coordination research. For example, Malaysia failures, and move an industry toward efficient funded industry-specific R&D, provided 143 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Box 3.7 Government sponsored innovation: Brazilian biofuels B razil launched its National Alcohol Program in 1975 to reduce its dependence on crude oil im- ports and to guarantee the profitability of the sugar 1988. However, as oil prices fell, the technology be- came less attractive and the costs of supporting the in- dustry rose. At the same time, world sugar prices rose industry by allowing excess sugar production to be and sugar growers shifted their cane to the production converted into alcohol (ethanol) in special distilleries of sugar for export instead of ethanol for the domestic located near sugar mills. market. Ethanol shortages developed and ethanol- Government support for the initiative has been ex- powered car sales dropped. As a result, the govern- tensive. Initially it was supported by legislation that ment gradually rescinded the program’s incentives and mandated that 24 percent of fuel sold for automobiles subsidies, although it still mandated that all gasoline must be in the form of ethanol. This requirement was contain roughly 20 percent ethanol, citing environ- complemented by sponsored research into the produc- mental benefits to justify the mandate. tion of, and eventually the subsidization of sales of, The flex-fuel car engine, which was able to run on cars that ran entirely on ethanol. Moreover, govern- any combination of ethanol and gasoline, was intro- ment credit guarantees and low-interest loans to con- duced in 2002 and, along with the surge in crude oil struct the refineries amounted to some 29 percent of prices, led to a revival of ethanol in Brazil. With the the overall investment cost of these ventures. At the recent rise in oil prices, ethanol-based cars are once same time, the state oil company, Petrobras, was again competitive, and ethanol produced from Brazil- required to make infrastructure investments in ian sugar can be produced for less than the equivalent ethanol distribution and to keep the cost of ethanol to quantity of gasoline. Other developing countries are consumers significantly cheaper than the cost of gaso- increasingly interested in adopting the Brazilian tech- line. Overall, the government spent $12.3 billion on nology to reduce their energy dependence and also to the National Alcohol Program during 1975–98. support their sugar sectors. During periods of high oil prices the program has been relatively successful, with ethanol-powered cars Source: Coelho and Goldemberg 2004; World Bank 1994; Xavier representing 90 percent of sales between 1983 and Marcos 2007. financing, built infrastructure, and of- operation in Chile to demonstrate its fered tax incentives to encourage the feasibility (Rodrik 2004). Korea and processing of palm oil (Chandra and Japan provided fiscal subsidies to create Kolavalli 2006).40 Governments have “national champions” in key sectors also encouraged innovation by improving (Hoekman, Maskus, and Saggi 2005). networking among enterprises, universi- Similarly, the Brazilian aircraft and ties, and government research institutes biofuel sectors (box 3.7), the Indian (Goldman and Ergas 1997). For example, pharmaceuticals sector, and the South government-funded technology parks in African automobile industry were devel- Taiwan, China, encouraged research by oped using tax incentives, regulatory providing high-quality facilities and by policies that encouraged domestic com- facilitating interactions among scientists. petition, science and technology support, Many governments finance agricultural and collaboration with foreign firms research and support farmers’ efforts to (UNCTAD 2003). exploit new technologies. • Imposing more dirigiste policies. Some • Providing direct subsidies for specific countries, particularly in East Asia, have products. The government started the guided production decisions through first commercial-scale salmon farming initially high import tariffs, export 144 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S Box 3.8 A successful government program of technological development and innovation financing in the Republic of Korea G DP per capita in Korea increased from $150 in 1960 to $16,000 in 2005, with GDP growing particularly rapidly during the 1980s and early With time, industry realized that domestically- developed technology could be internationally compet- itive and began investing heavily. As a result, Korean 1990s as technological progress accelerated. Although industry transformed itself from a low-tech, labor- an outcome of many factors, Korea’s technologically intensive exporter to one of the world's leading high- intensive growth spurt had a strong public policy tech producers. Private sector expenditures on R&D element. Government-funded research institutes, in- have increased rapidly since 1990—almost doubling cluding the Korea Science and Engineering Founda- over the past decade—and are now the main source of tion in the 1970s, recognized the need to enhance co- R&D financing. Nanotechnology, information operative research between universities and industry technology, and biotechnology are the main axes of (80 percent of the nation’s research capability was the government’s focus on R&D at the generation university based in the 1970s). The government cre- stage. ated research centers located within corporations to supply industry with high-tech research capability and industry dictated the focus and area of research. Source: World Bank. subsidies, government influence over the Embraer did not become commercially suc- allocation of production, and directed cessful until it was privatized. More generally, credit programs. The extent to which such the import-substitution policies followed by policies were necessary to these countries’ many countries in Latin America and Africa success has generated some controversy and India’s inward-focused policies severely (Hernandez 2004), and the forms of hampered economic and technological devel- intervention in high-growth East Asian opment. To take two of the countless exam- economies were by no means identical. ples, first, rather than promoting the develop- For example, Korea (box 3.8) favored tar- ment of a technologically sophisticated export iff protection and constraints on FDI to industry, the tariffs, price harmonization, and maximize technology transfer; Singapore import licensing programs imposed in Côte encouraged FDI; and Hong Kong, China, d’Ivoire diminished incentives for efficiency in practiced laissez-faire policies. Neverthe- its textile industry, making it internationally less, some observers doubt that such in- uncompetitive. Second, Brazil’s attempts to terventions were pervasive in many of the promote its domestic personal computer sec- most successful East Asian economies. tor by banning imports and FDI, awarding li- censes for production, providing fiscal incen- But government efforts at promoting tives, and establishing a public research center technological champions have often failed resulted in an inefficient industry, high domes- Notwithstanding the wide range of support tic prices, and lagging technology (World policies that governments have tried and the Bank 1998). existence of many apparent success stories, Two important issues distinguish industrial such policies have often been spectacular fail- policies in the successful East Asian countries ures. Even among the examples cited, it is not with those in many other countries. First, in clear that all should be considered successes. contrast to Latin America, where subsidies For example, the Brazilian aircraft maker were often provided free of performance 145 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 criteria, East Asian countries conditioned Branstetter, Fisman, and Foley 2005; Maskus subsidies on performance (often export per- and Konan 1994). Other studies show a posi- formance), essentially relying on external tive effect of strong intellectual property competition to discipline the market.41 Sec- regimes on FDI both in influencing location ond, East Asian countries maintained high- decisions by multinational corporations and quality bureaucracies that for the most part in inducing foreign firms to invest in produc- avoided capture by industrial interests, thereby tion rather than in distribution activities maintaining a balance between knowledge (Javorcik 2004; Lee and Mansfield 1996; and involvement in productive activities and Mansfield 1994; Maskus 1998).42 Some evi- state autonomy. In Latin America, industrial- dence suggests that while a stronger intellec- ists often captured bureaucracies, while in tual property rights regime is associated with many Sub-Saharan African countries, the in- a rise in flows of knowledge to affiliates and in terests of industrialists or corrupt officials inward FDI toward middle-income and large dominated government interventions. developing countries, this is not the case for poor countries (Fink 2005; Hoekman, Imitation opportunities may boost Maskus, and Saggi 2005; Smith 2001). technological diffusion, but have costs Overall, the impact of intellectual property The possibility of adopting technologies rights on FDI depends on the nature of the already elaborated in more technologically sector. Intellectual property rights appear to advanced economies represents a fundamental have little impact on investment in lower- advantage of less-advanced developing technology goods, such as textiles and ap- economies and is the basis for much of their parel; services sectors, such as distribution and R&D and outreach activity. Indeed, many de- hotels; or in sectors where the sophistication veloping countries with relatively advanced of the technology itself or the cost of produc- levels of technological achievement (Brazil, tion already serves as an effective barrier to China, India, the Republic of Korea, Mexico, entry. Indeed, the increased ease with which and Malaysia), as well as Japan, initially used some products such as pharmaceuticals, chemi- an explicit policy of copying foreign technolo- cals, food additives, and software are reproduced gies. While this strategy proved successful to a point, eventually the successes that these economies had in the markets of their higher- Figure 3.18 Levels of intellectual property technology competitors meant that these protection competitor countries became increasingly Index unwilling to share technology with them. 5 A substantial literature attempts to grapple High-income countries with the trade-off between the impact of 4 weaker intellectual property regimes and the potential for increased technological diffusion 3 in a host country and with the impacts that Upper-middle- such regimes might have on foreign partners’ income countries willingness to undertake FDI and licensing 2 Low-income countries agreements. Although the theoretical litera- Lower-middle-income countries ture emphasizes the importance of intellectual 1 property regimes (Lai 1998; Taylor 1994), the 1970 1975 1980 1985 1990 1995 2000 2005 empirical evidence is ambiguous overall. Source: World Bank calculations based on individual country Some studies find no relationship between data provided by Walter Park, American University. Note: A higher score on the index indicates stronger the level of intellectual property rights and intellectual property rights. FDI or licensing (Primo Braga and Fink 2000; 146 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S may explain the rising interest in establishing in- corruption and is frequently biased in favor of tellectual property rights (Maskus 2000). local products (most developing countries pro- Perhaps reflecting such considerations, a vide preferential treatment to local suppliers in general trend toward strengthening the legal government procurement [Kohr 2007]), the protection afforded by intellectual property use of advanced communications and informa- rights has been apparent since the latter half of tion technologies can raise the transparency the 1980s (figure 3.18). Among developing and efficiency of government procurement countries, the legal basis for such rights has and can ensure greater competition, thereby progressed most in upper-middle-income contributing to an overall improvement in the countries, where levels of protection now ex- quality of government services. ceed the levels in high-income countries in the More broadly, the integration of informa- mid-1990s. Progress in lower-middle-income tion and communications technology tools and low-income countries has been less has tremendous potential for improving access marked, reaching about the same level as in to government information, increasing public high-income countries in the 1990s and 1970s participation in government decision making, respectively (note, however, that the index in and making government services more readily figure 3.18 refers to the protection offered in available to the public (World Bank Informa- statutes, not in practice). tion for Development Program and Center for Democracy and Technology 2002). In addi- Governments can also promote tion to enhancing government efficiency, such technological progress in their own improvements can help reduce costs and im- operations . . . prove services to private sector firms, thereby In many developing countries the government increasing the potential for technological accounts for a significant share of productive progress. While many industrial countries activities. Using technology to increase the pro- have used the Internet to improve local access ductivity of government operations can help to information and services, its potential re- raise the efficiency of the economy as a whole mains largely unexploited in many developing by improving health and education services countries. Nevertheless, some developing (see chapter 2 and the foregoing discussion of countries are implementing e-government sys- human capital); enhancing the effectiveness tems that are as or more sophisticated than and reducing the costs of publicly-provided those used in some high-income countries power, telecommunications, and water and (United Nations 2003). Also, the use of sanitation; providing approaches to regulation electronic systems has helped improve the effi- and tax administration that are less burden- ciency of customs services in many countries. some to firms; and demonstrating the feasibil- A survey of case studies in developing ity of new technology that firms can copy. One countries outlines some initial steps in use of area where dramatic efficiency gains are possi- the Internet to improve tax administration ble is greater use of technology in government and general services and to enhance the trans- procurement. Countries that have imple- parency and efficiency of government opera- mented Internet-based procurement systems tions (Ndou 2004). The survey underlines the include Brazil (including in some local govern- importance for the success of e-government ments), Chile, Mexico, and the Philippines.43 initiatives of appropriate stocktaking of the Implementing e-procurement systems may re- current state of telecommunications networks; quire changes in laws and policies governing of raising awareness of the potential for, in- government operations (for example, ensuring formation and communications technology that government agencies can contract with beginning with relatively small projects to test foreign firms that can provide such systems. feasibility; of stimulating collaboration among Although procurement is often a focus of government departments; and of making 147 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 substantial investments in equipment and soft- product and the market structure involved. ware, human capital, and appropriate organi- Standards may be defined by private firms with zational changes. Other important issues perti- dominant market shares or agreed on through nent to implementing e-government systems a collaborative process negotiated within the include its coverage (comprehensive, national context of professional organizations. They efforts may be appropriate for small countries, may also be imposed by government regula- but may be too complex and difficult in large tion, or they may derive from some combina- countries); the ability of the enabling environ- tion of collaboration and imposition. Partici- ment to support e-government initiatives, for pation in international organizations can help instance, adequate infrastructure, an appro- developing countries understand and influ- priate legal framework, political commitment, ence international standards. The Interna- and public involvement; and the availability of tional Organization for Standardization, with strong project management skills (Bhatnagar 132 developing country members, is a forum and Deane 2002). for agreement on technical specifications for a variety of products.44 . . . and encourage improved technology through product standards Coherent policies and committed Governments can play a key role in boosting government leadership are critical for technological progress by defining and pro- technological progress moting standards for products made by pri- No single blueprint for technological progress vate firms and by facilitating quality control exists, but most success stories have involved to help firms comply with standards. Good strong central leadership to ensure a consis- standards support technological progress by tent and effective policy framework that sup- increasing consistency and ensuring minimum ports the development and commercialization product performance; facilitating the connec- of innovations. Technological progress is tion of components in complex systems by largely implemented by private firms. How- standardizing the interfaces between different ever, progress at the firm level requires gov- parts of the system; offering buyers a greater ernment support, elements of which include choice of suppliers at lower risk and lower the following: an appropriate incentives cost and the prospect of faster and more framework, including overall political and reliable system development; and offering economic stability and government trans- manufacturers and vendors easier entry to parency, along with specific technology poli- markets, economies of scale, and lower prod- cies such as protection of intellectual property uct liability risks (Yokota and Weiland 2004). rights; investments in human capital, includ- The transmission of information about stan- ing general education and technical training dards can be an extremely useful channel for where firms underinvest in training because of technology transfer. Implementing well-defined the potential mobility of trained staff; support standards, including testing and sanctions for for R&D of new-to-the-market technologies noncompliance, can be critical in maintaining because of difficulties in appropriating the full a country’s reputation for quality, which is im- benefits from such efforts; and, where appro- portant for establishing and maintaining ac- priate, government interventions to overcome cess to global markets. market failures involving coordination, The value of a country’s reputation, the ben- threshold effects, and agglomeration effects efits of coordination, and the protection of (box 3.6). Most technological success stories, health and safety underline the government’s including Germany in the 19th century, Japan role in promoting and enforcing standards, before and after World War II, the East even in competitive product markets, but the Asian miracle countries, Chile, Ireland, and government’s specific role will depend on the Israel have involved strong national leadership 148 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S Figure 3.19 Level of and recent changes in technological absorptive capacity Technological absorptive capacity Index 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 High-income Upper-middle-income Lower-middle-income Low-income countries countries countries countries Change in technology absorptive capacity (2000s versus 1990s) % change 40 30 20 10 0 Ϫ10 Ϫ20 High-income Upper-middle-income Lower-middle-income Low-income countries countries countries countries Source: World Bank. and a coherent strategy for promoting two-step procedure was followed. The first technology. step was to estimate a separate summary index of the quality of the macroeconomic environment, financial market intermedia- An overall index of technological tion, human capital, and governance. The absorptive capacity technical annex to chapter 2 describes Figure 3.19 summarizes countries’ level of the estimation process used and the results of technological absorptive capacity and the principal components analysis in more changes over the past 10 years. The overall detail than provided here and table A2.2 index was generated following the same summarizes the individual indicators that methodology used to construct the index of went into the index. technological achievement discussed in chapter The most important determinants of the 2 and the index of exposure to external tech- overall index are the governance variables nologies discussed earlier in this chapter. As (with a 37 percent weight), followed by was the case for technological achievement, a human capital variables (with a 25 percent 149 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 weight), and financial intermediation (with a has reached the limits that can be achieved 27 percent weight), followed by the macro- from relatively easy adoption and imitation of economic environment (with an 11 percent existing technologies given current levels of ab- weight). sorptive capacity and that further improvement Compared with the technological achieve- may require substantial enhancement of ab- ment index, technological absorptive capacity sorptive capacity. is more clearly correlated with income, with less of an overlap across countries in different income groups. This probably results from the Conclusion complex causal relationship that may exist be- tween technological absorptive capacity, tech- nology, and income, in which technology is a T echnology diffusion in developing coun- tries depends both on access to foreign technology (through trade, FDI, international function of technological absorptive capacity migration, and other networks) and on the and affordability, income is a function of tech- ability to absorb technology (as determined by nology, and affordability is a function of in- the quality of government policy and institu- come, with income being both an indirect tions, the stock of human capital, the efforts at cause and an effect of technological absorptive R&D, and the financial system). One implica- capacity. tion of the analysis and data presented in the Reflecting the complexity of the institu- preceding two chapters is that prospects for tions that generate technological absorptive further technological progress in low- and capacity and the difficulties of reforming middle-income countries are good. Over the some of the measures included in the index past 15 years, the main international channels (see technical annex to chapter 2), progress through which technology is transferred have has been more limited than was the case for increased. Developing countries’ imports of technological achievement (where the index high-tech goods and of capital goods have increased by 160 percent for low-income risen relative to GDP, and their share in global countries). Relatively few countries improved high-tech export markets has increased. In- their overall score for absorptive capacity by flows of FDI have increased sixfold relative to more than 10 percent between 1990 and developing countries’ output, and opportuni- 2000 (the strongest negative score in low- ties to purchase technology have risen along income countries was recorded by Zimbabwe with FDI outflows. and reflects mainly the deterioration in Simultaneously, the absorptive capacity of macroeconomic and governance conditions developing countries has been increasing, al- there in recent years). Moreover, in contrast beit more slowly. Youth literacy rates are as to technological achievement, there is little much as 15 percentage points higher than for sign of catch-up. Developing countries are the adult population. As a result, the basic improving their technological absorptive ca- technical literacy of the population has been pacity at about the same rate as high-income increasing, and it should continue to do so for countries.45 many decades. The macroeconomic instability The relatively weak improvements in ab- that plagued developing countries during the sorptive capacity notwithstanding, the relative 1970s and 1980s has declined, and the busi- strength of the technological improvement ob- ness climate has improved, although not by served to date might be comforting. At the as much or as uniformly as one might have same time, the relatively weak increases in tech- hoped. Technological achievement should nological achievement in Latin America and continue to rise over the medium term as long the Caribbean and in the Middle East and as these trends continue and assuming there North Africa may reflect that technological are no major disruptions to global trade and progress (and TFP growth) in those countries financial systems. 150 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S Of particular note is the speed with which middle-income countries. However, this find- communications technologies are evolving ing reflects rapid progress in a few countries and diffusing in the developing world. Only and more modest performance in many others 27 years after the introduction of cell phone that are only maintaining their ground relative technology, mobile phones are being used in to high-income countries. virtually every country, and penetration rates Notwithstanding strong technological are rising rapidly. Moreover, the range of eco- progress in some cities and greater openness to nomic activities that were once heavily depen- technological flows, the gap between existing dent on infrastructure and that are now being competencies and those needed to converge conducted using mobile phone technology is with technological progress in high-income impressive and growing daily. Already mobile countries is immense, especially in rural areas. phones are bringing banking, remittances, and Moreover, the pace at which absorptive ca- arm’s-length financial transactions to regions pacity is rising is disappointing. While some of the world that until recently were unserved. countries have recorded significant increases, Given the pace at which things are changing, on average, developing countries are not most developing countries should continue catching up to high-income countries, suggest- to see a rise in their ability to communicate ing that the gap in their technology potential and process information over the next few is not closing. As a result, unless substantial decades, which should help speed the diffu- steps are taken to raise basic competencies sion of other technologies as well. and invest in local networks that successfully For middle-income countries, the relatively disseminate technologies and technological rapid technological progress of the past few competencies, many of these countries are not years and the improvements in both openness expected to be able to master anything more and technological adaptive capability suggest than the simplest of forthcoming technologies that their level of technological sophistication (box 3.9). should continue to converge with that of higher- One bright spot is the relatively rapid dif- income countries. However, even the most ad- fusion of some new technologies in low- vanced of the middle-income countries will be income countries. Declining computing costs unable to benefit fully from the new technolo- and prospects for rapid declines in the cost gies that are expected to become both techni- of wireless Internet connections may en- cally and economically viable over the next hance the efficiency of ongoing economic several years because of inadequacies in their activities in low-income countries and may infrastructure (unreliable power or communi- enable them to leapfrog into more advanced cations systems), insufficient technical literacy, technologies (Primo Braga, Daly, and Sareen or the absence of a critical mass of scientists and 2003).46 However, successful exploitation of engineers necessary to exploit the technology these new technologies will require stepped- (box 3.9). For some countries, the relative slow- up investments in human capital and reforms ness with which technological absorptive in policy and regulation to provide an ap- capacity has been advancing could slow the propriate incentives structure for invest- pace of convergence as missing competencies ments in information and communications become an increasingly binding constraint on technology. the absorption of additional technologies. A rigorous road map for achieving rapid For low-income countries, the prospects are technological progress does not exist. Never- more complex. On average, among the low- theless, the evidence presented in this report income countries for which sufficient data are points to a number of conclusions, principles, available to calculate recent increases in and policy directions that appear likely to pro- technological achievement, convergence is mote technological progress and that may be occurring and is doing so more quickly than in able to guide policy makers. Exactly how 151 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Box 3.9 Technology in 2020 A recent report by the Rand Corporation (Silber- glitt and others 2006) examines some 56 emerg- ing technologies expected to be commercially avail- to exploit the technology (see the table). The report finds that most high-income countries will be able to adopt and exploit all the technologies effectively. A able by 2020 and evaluates in detail the 16 judged to second group of countries, including China, India, be most important on the basis of technical feasibil- Russia, and the countries of Eastern Europe, are found ity, marketability, and societal impact. These applica- to have a considerable level of scientific and techno- tions include improvements in health services (tar- logical proficiency in specific applications. However, geted drug delivery, improved diagnostic and surgical barriers to technology adaptation are likely to limit methods), in access to information (rural wireless their ability to take advantage of the most sophisti- communications, quantum cryptography), and in the cated network applications. A third group of middle- environmental sustainability of products and services income countries, which consists of several Latin (improved water purification, green manufacturing, American countries, Indonesia, South Africa, and hybrid vehicles). It then examines the technical base Turkey, lacks more prerequisites and is therefore ex- a country requires to make effective use of each tech- pected to exploit fewer of these technologies. A final nology and the likelihood that each of 80 representa- group that comprises most of the world’s poorest tive economies, including both high-income and de- countries, including most of the countries of Africa, veloping countries from every region in the world, the Middle East, and Oceania, is projected to make will be able to exploit these technologies by 2020. use of only the simplest of the new technologies. While many countries are expected to be able to This analysis provides a useful snapshot of the take advantage of some of the simpler-to-use tech- prospects for technological progress based on current nologies, a wide range of countries are not expected data. However, it does not incorporate the potential for to be able to do so because they lack the required dynamic improvements in technological progress, for technological infrastructure, because their population example, through the rapid dissemination of existing is not sufficiently technically literate, or because a new technologies, which could rapidly improve devel- critical mass of scientists and engineers is not present oping countries’ ability to absorb new technologies. Technological adaptive capacity may restrict the diffusion of future technologies Most of Africa, Latin America, China, India, Middle East, South Africa, Russia, Technology application Oceania Turkey, Indonesia Eastern Europe Industrial countries Technologies likely to be mastered by 2020 (¸) Cheap solar energy ¸ ¸ ¸ ¸ ¸ ¸ ¸ ¸ Requires increased technological sophistication Rural wireless communication Genetically modified crops ¸ ¸ ¸ ¸ Filters and catalysts ¸ ¸ ¸ ¸ Cheap autonomous housing ¸ ¸ ¸ ¸ Rapid bioassays ¸ ¸ ¸ Green manufacturing ¸ ¸ ¸ Ubiquitous RFID tagging ¸ ¸ ¸ Hybrid vehicles ¸ ¸ ¸ Targeted drug delivery ¸ ¸ Improved diagnostic and surgical techniques ¸ ¸ Quantum cryptography ¸ ¸ Ubiquitous information access ¸ Tissue engineering ¸ Pervasive sensors ¸ Wearable computers ¸ Source: Silberglitt and others 2006. Note: RFID ϭ radio-frequency identification. 152 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S much weight to give to each of these conclu- testing, marketing, and dissemination sions and how they interact depends on spe- activities. The huge rural–urban divide in cific country circumstances and should be the both technology and absorptive capacity subject of future research. These policy direc- in many developing countries underlines tions include the following: the importance of such activities to in- clusive development. • Openness to external technologies • The government can also have an impor- through foreign trade, FDI, diasporas, tant impact on economic progress by in- and other international networks is criti- tegrating new technology into its own cal for technological progress for both operations, including in the provision of low- and middle-income countries, education, health, and publicly-provided where most progress occurs through the infrastructure; in the procurement of adoption, adaptation, and assimilation goods and services; in the provision of of preexisting but new-to-the-market or information and in fostering public dia- new-to-the-firm technologies. logue; and in the definition of standards • The capacity of firms or individuals to use for commercial products. a technology depends critically on the • The principal challenge facing many low- basic technological literacy of workers and income countries is not their access to consumers. The level of technological lit- technology, but their absorptive capacity, eracy, in turn, depends on the government’s including physical, human, and institu- capacity to deliver a quality education to tional capacity; their limited financial the largest number of people possible. resources; and the extent to which their • The preeminent vehicles for the dissemina- social and political environments are tion and diffusion of technology in a mar- supportive of entrepreneurship, invest- ket economy are firms and entrepreneurs. ment, and technological progress. Their success in doing so depends on their These conclusions highlight the critical role ability to undertake and expand new activ- of the government in establishing the general ities. This requires a stable macroeconomic conditions that support rapid technological environment, together with a regulatory progress, in helping to overcome market fail- environment that effectively enforces ures that constrain innovations by firms, and property rights and the rule of law, does in providing (and purchasing) high-quality not excessively restrict firms’ ability to hire goods and services. Countries that have and fire, and does not impose excessive achieved sustained and rapid technological regulatory or financial burdens. progress have generally benefited from com- • The capacity of firms or individuals to mitted national leadership that follows coher- take advantage of a technology can be ent development policies, although the nature constrained by affordability and by li- of these policies—in particular, the degree of quidity, thereby placing a premium on the public sector intervention in private markets— efficiency with which the financial system has varied enormously. intermediates between savers and bor- rowers both domestically and abroad. • Given the existence of market failures, Notes the government has a role to play in as- 1. The econometric evidence is mixed. Harrison (1994) for Côte d’Ivoire and Haddad, de Melo, and sisting firms to learn how to adapt, Horton (1996) for Morocco find no statistically signif- adopt, and market new technologies. In icant impact of import penetration on productivity fol- addition to focusing on R&D in new-to- lowing trade liberalization. Nishimizu and Page (1982) the-market technologies, applied R&D for the former Yugoslavia; Tybout, de Melo, and agencies need to emphasize outreach, Corbo (1991) for Chile; and Tybout and Westbrook 153 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 (1995) for Mexico find a positive relationship between (2000) find that Ghanaian firms with higher technical import penetration and firm efficiency. Grether (1999) efficiency become exporters. Isgut (2001) finds that and van Wijnbergen and Venables (1993) for Mexico, exporting firms in Colombia had higher labor produc- Earle and Estrin (2001) for Russia, Falk and Dierking tivity than nonexporters three years before entering the (1995) for Poland, Levinsohn (1993) for Turkey, and export market, but that afterward there is no difference Roberts (1996) for Colombia find a positive impact of in the growth of labor productivity of exporters as com- import penetration on either industry markups or mea- pared with nonexporters. Fafchamps, Zeufack, and sured labor productivity. El Hamine (2002) find that in Morocco, more produc- 2. Keller (1998) casts doubt on these results by tive firms move into exports. However, after initiating showing that the relationship also holds for randomly exports they do not achieve more rapid reductions in generated import shares, but Lumenga-Neso, Olarreaga, production costs than nonexporters, although they do and Schiff (2005) find that imports from countries that learn to improve product design to suit foreign markets. import from other R&D centers are positively related 7. Following Lall (2001), the nomenclature used is to productivity and that these indirect spillovers are at SITC 3-digit, Rev. 2. least as important as direct spillovers. 8. Costa Rica has emerged as a high-tech platform 3. Lall (2000, 2001) identifies four categories of for foreign investors and increased its world market products: resource-based products; low-tech products, share of high-tech products from 0.01 to 0.20 percent which include textiles and fashion; medium-tech prod- between the mid-1990s and 2002–04. ucts; and high-tech products. According to this classifi- 9. Between 1992 and 2003, developing countries cation, which is defined using SITC 3-digit rev. 2, made some 2,563 favorable changes to national laws technological products do not include agricultural and regulations relating to FDI. The most frequent products, moderately processed food products, to- changes concerned FDI promotion and incentives bacco products, minerals, construction materials, and (855), sectoral restrictions (497), operational condi- energy products. tions (406), guarantees (304), and corporate regula- 4. Available data provide only a rough indication of tions (153). During the same period, 113 developing the sophistication of economic activity, because ascer- countries became members of the World Trade Orga- taining the level of sophistication of the capital goods nization, which required the elimination of many re- imported is not possible. Also some countries may im- strictions and impediments to FDI, particularly in the port relatively sophisticated capital goods for use in en- services sector (World Bank 2004a). clave production (for example, oil and minerals) with 10. The world’s largest R&D investors conducted little spillover into the rest of the economy. an average of 28 percent of their R&D outside their 5. Chandra and Kolavalli (2006) cite important home territory in 2003 (UNCTAD 2005). spillover effects from exporting electronics and software. 11. This section builds on many studies of FDI 6. The contradictory evidence from case studies spillovers that have identified possible channels for and econometric studies may be due to the different technology transfers and knowledge spillovers impacts of exports across industries and countries, as through FDI (Görg and Greenaway 2004; Görg and well as difficulties inherent in classifying firms (some Strobl 2001; Javorcik 2007; Lipsey 2002; Moran studies classify exporters on the basis of surveys with 2007; Saggi 2002). yes-no answers rather than measuring the volume of 12. Javorcik (2004) finds that the TFP of Lithuan- exports) (Keller 2004). Also the argument for tech- ian firms is positively correlated with the extent of po- nology transfers through exports refers only to some tential contacts with multinational customers in down- exports—namely, new products or products that have stream sectors. Blalock and Gertler (forthcoming) and evolved over time, and export statistics may not cap- Kugler (2006) find strong evidence that vertical supply ture such subtleties. Firms that export the same prod- chains were a channel for technology transfers in uct that is not subject to significant upgrading may not Colombian and Indonesian manufacturing sectors. benefit from spillovers. If some firms improve their Swinnen and others (2006) show that investments by productivity through exports and some do not, and foreign companies in processing and retailing in East- available data do not permit distinguishing between ern Europe have introduced higher standards, which in these firms, measuring the extent of productivity im- turn led to significant efficiency gains by suppliers. provements over time may be difficult. For specific ex- 13. Javorcik (2007) documents the increased com- amples, see Tybout and Westbrook (1996), who find petitive pressures from foreign entry in Czech and Lat- that trade liberalization in Mexico benefited exporters vian firms, and the McKinsey Global Institute (2003) because of declines in prices of imported inputs, but cites case studies where competition is a key factor in had no effect on productivity. Soderbom and Teal diffusing FDI-introduced innovations. 154 D E T E R M I N A N T S O F T E C H N O L O G I C A L P R O G R E S S 14. Ayyagari and Kosova (2006), using Czech FDI sending countries, (b) knowledge spillovers when re- data for 1994 to 2000, show that spillovers vary sub- turning migrants assume managerial positions in their stantially across industries. Although service industries home country, (c) networks of diaspora researchers benefited from huge FDI spillover effects through both and scientists performing research directed at the needs horizontal and vertical channels, manufacturing indus- of their country of origin, (d) “virtual” return through tries did not show any significant positive spillover ef- extended visits and electronic communication in fields fects from FDI. such as medicine and engineering, and (e) return to 15. Belderbos, Capannelli, and Fukao (2000) find permanent employment in the country of origin after that the proportion of inputs sourced locally by Japan- gaining work experience in the host country. ese multinationals increases with the number of years 23. Estimates suggest that a 10 percent increase in of operation in a given host country. skilled migrant stock in the United States is associated 16. These data are incomplete, as only 90 of 150 with a 4 percent increase in the flow of FDI (in current developing countries (on average across 1999–2006) dollars) to the home country (Mattoo, Özden, and reported royalty and license fee payments. The data Neagu 2005). may also overstate payments for technology transfer, as 24. This result is supported by work on high- developing countries with mineral or oil investments income countries that shows immigrant ties have been abroad may report the payment of substantial royalties important determinants of U.S and Canadian bilateral that represent fees for extraction rights rather than for trade (Gould 1994; Head and Ries 1998; Wagner, the purchase of technology. Head, and Ries 2002). 17. Between 1990 and 2000, the number of tertiary- 25. Kuznetsov (2007) argues that diasporas can act educated emigrants from developing countries that as global search networks by leveraging their contex- resided in OECD countries rose from 19.1 million to tual knowledge of their home countries’ economy and 37.8 million (Docquier and Marfouk 2004). institutions to identify untapped resources and oppor- 18. Even though a majority of Argentine doctoral tunities, such as research capabilities, availability of graduates in the United States prefer to remain in the technical manpower, and business-friendly local gov- host country, most respondents in a survey of high- ernments. skilled Argentine diaspora members in Europe, the 26. Among members of the Philippines Brain Gain United States, and elsewhere expressed their willing- Network, 35 percent have a master’s degree and 23 per- ness and interest in helping develop science, technol- cent hold a doctorate, while 49 percent of the members ogy, and education in their home country (Kuznetsov, of the South African Network of Skills Abroad have a Nemirovsky, and Yoguel 2006). master’s degree and another 30 percent have a doctor- 19. Of these technologically sophisticated émigrés, ate (Brown 2000). 56 percent were born in Asia, with Latin America and 27. The Taiwanese diaspora and returning migrants the Caribbean accounting for another 15 percent were active conduits for technology transfers. For ex- (Kannankutty and Burrelli 2007). ample, in 2000, 113 out of 289 companies at the Hin- 20. Agrawal, Kapur, and McHale (2007), using schu Science-Based Industrial Park in Taiwan, China, patent data, find evidence of the influence of the dias- were started by U.S.-educated Taiwanese (O’Neil 2003). pora in technology transfers to home countries. 28. Countries with strong institutions such as 21. The Mexican Ministry of Science and Technol- Chile, the Republic of Korea, and Scotland have been ogy views the presence of 1 million tertiary-educated able take advantage of their high-skilled diasporas, Mexican migrants in the United States, with an esti- while others such as Argentina, Armenia, and mated 400,000 in managerial positions, as a unique, un- Colombia have not succeeded as well despite having explored opportunity for knowledge transfers many programs (Kuznetsov 2006). (Kuznetsov 2006). Emigrants from China and India 29. Finding a relevant, available indicator of the were running almost 30 percent of Silicon Valley’s size of the diaspora to include in the index proved dif- (California) technology businesses by the end of the ficult. The data series used included FDI net inflows, 1990s (Saxenian 2000, 2002). In addition, 25 percent of royalties and license fee payments, imports of high- all engineering and technology companies started in the tech goods, imports of capital goods, and imports of United States during 1995–2005 had a foreign-born per- intermediate goods—all as a percent of GDP. Imports son as a key founder (Wadhwa and others 2007). of intermediate goods and net FDI inflows have the 22. Page and Plaza (2006) argue that technology largest weight in the calculation, accounting for more transfer by migrants takes place through several chan- than half the total. nels: (a) licensing agreements between diaspora-owned 30. The productivity benefits from the adoption of or managed firms in host countries and firms in new technology are best realized in the context of low 155 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 inflation, stable exchange rates, sustainable government not very effective on average, with success being heav- finances, and positive income growth (Pack 2006). ily dependent on the design of the tax measures. 31. Liu and Tybout (1996) and Roberts and Tybout 41. Such programs are more difficult to implement (1997) present data from Chile, Colombia, and today in light of World Trade Organization restrictions Morocco confirming that the entry and exit of firms on export subsidies (Rodrik 2004). makes an important contribution to productivity 42. The intellectual property regime is only one growth. consideration among many, including various local 32. Data are taken from the World Bank’s Doing market and sector characteristics, that enter into multi- Business Web site (http://www.doingbusiness.org). national corporations’ decisions on how to deploy 33. See Keller (2004) for a survey of the economic technology internationally (Mansfield 1994, 1995). literature on this topic. Education levels are typically 43. See World Resources Institute Digital Dividend important in empirical studies of cross-country differ- (http://www.digitaldividend.org) and the Working ences in growth rates and in labor productivity (Chen Group on E-Government in the Developing World and Dahlman 2004), but these studies do not deter- (http://www.pacificcouncil.org/pdfs/e-gov.paper.f.pdf). mine the channel through which human capital con- 44. See http://www.iso.org. tributes to growth. 45. There is a slightly inverted U shape to the dis- 34. In some countries, the limited rise in public ex- tribution of improvements in technological absorptive penditures on education may have been balanced by in- capacity, with high-income countries recording a creases in private expenditures. 9.1 percent improvement, compared with 9.4 percent 35. Ayyagari, Demirgüç-Kunt, and Maksimovic for upper-middle-income countries, 9.8 percent for (2007) find a positive correlation between financial lower-middle-income countries, and 8.6 percent market depth (proxied by credit to the private sector as among those low-income countries for which data are a percent of GDP) and R&D intensities. available. 36. These requirements are generally imposed to 46. The development of simple, low-cost computers reduce volatility in these often thin markets and to and the spread of open-source technology has already bolster investor confidence in the safety of investing enhanced the affordability of new technologies for in listed firms. 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Global Development Finance: The “China and the Knowledge Economy: Challenges Globalization of Corporate Finance in Develop- and Opportunities.” Staff Working Paper 4223. ing Countries. Washington, DC: World Bank. World Bank, Washington, DC. 164 Appendix Regional Economic Prospects East Asia and the Pacific exports for technology-producing countries in Recent developments the region. The pickup in regional growth was Growth in the developing countries of East all the more notable because it occurred Asia and the Pacific strengthened in 2007, despite a slowdown in the U.S. economy: total with gross domestic product (GDP) advancing U.S. imports fell from 5.8 percent growth in a full 10 percent in the year, up from 9.7 per- 2006 to 2 percent in 2007. Regional exports cent in 2006. The expansion was powered by nonetheless advanced 17.8 percent, a modest China’s 11.3 percent gain, with other coun- pickup from 2006 outturns. tries in the region growing at a 5.9 percent East Asia appears to have absorbed the ef- pace (figure A1). Domestic demand was a key fects of the financial turmoil in the high- driving force for many economies, as a down- income markets well. Stock markets in the turn in the global high-tech cycle for most of main East Asian economies dropped a median 2006–07 served to blunt the momentum of 14 percent during July and early August, with equity prices increasing a median 22 percent to mid-October. Similar developments were witnessed in foreign exchange markets and in Figure A1 East Asian growth moves up in sovereign bonds. Since the beginning of the 2007 year, several East Asian currencies have ap- preciated sharply against the dollar, with the GDP growth (percent) 12 Philippine peso up 12 percent and the Thai baht up 11.3 percent. The Chinese yuan con- 10 tinued its gradual rise against the dollar, a 2007 4.7 percent gain since the beginning of the 2006 8 2005 year, but at the same time, the yuan depreci- ated against many other currencies. 6 On the policy front, East Asian central 4 banks generally tightened monetary condi- tions from mid-2004 to the early part of 2006 2 to curb rising inflation. As a result, inflation stabilized in 2007 (although headline inflation na ia am s hi c ci d rie As C ifi Pa an hi n na fic g ac nt C et st e a ou in P rates, which include fuels and food, have Vi th Asi Ea ud e lc cl th st h al ut ex and Ea Sm turned up recently in some countries because So a i As of higher food price inflation), allowing cen- st Ea tral banks to keep policy rates stable, and Sources: World Bank and national agencies. even to begin easing in Indonesia and Thailand 165 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 efforts, relatively low interest rates, and sus- Figure A2 Except for China, inflation is tained economic growth since 2001. now stabilizing across East Asia External conditions during 2007 remained Consumer price inflation (percent change year over year) sufficiently positive for surplus positions to 8 18 Indonesia (right axis) China widen across countries. Central banks in 15 China, Indonesia, Malaysia, the Philippines, 6 Philippines and Thailand continued to build up reserves as 12 their current accounts remained in surplus. 4 9 East Asia’s aggregate current account sur- plus as a share of GDP increased to 10.1 per- 6 2 cent in 2007, up from 8.4 percent in 2006. 3 Gross capital flows, including bond and equity Malaysia Thailand issuance and net bank borrowing, amounted 0 0 Jan. May Sept. Jan. May Sept. to a remarkable $170 billion over the year 2006 2006 2006 2007 2007 2007 through October. This contrasts favorably Source: World Bank. with inflows of $153 billion for all of 2006 and $107 billion for 2005, indicating that mar- ket access has remained largely unencumbered. At the same time, the contribution of net ex- (figure A2). Fiscal balances have improved and ports to GDP growth increased 3 percentage government debt has declined over the course points, as exports expanded by 17.8 percent, of the decade in most of the larger East Asian significantly outpacing the 15.3 percent economies thanks to fiscal consolidation growth in imports (table A1). Table A1 East Asia and Pacific forecast summary (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 GDP at market pricesb 8.4 9.0 9.1 9.7 10.0 9.7 9.6 GDP per capitac 7.1 8.1 8.2 8.8 9.1 8.8 8.7 Purchasing Power Parity GDPd — 9.2 9.3 9.9 10.2 9.9 9.7 Private consumption 7.3 6.8 7.5 7.4 7.6 7.6 7.6 Public consumption 9.0 6.7 10.9 8.5 9.0 8.5 8.6 Fixed investment 10.3 11.5 12.7 10.9 11.3 9.9 9.6 Exports, GNFSe 11.7 22.6 17.8 17.7 17.8 15.2 18.5 Imports, GNFSe 11.3 20.6 10.5 14.8 15.3 14.2 19.4 Net exports, contribution to growth 0.3 1.8 3.9 2.8 3.0 2.3 2.1 Current account balance/GDP (%) 0.1 3.4 5.7 8.4 10.1 8.6 7.6 GDP deflator (median, LCU) 6.5 6.1 3.8 4.3 4.6 2.9 3.8 Fiscal balance/GDP (%) Ϫ0.7 Ϫ1.5 Ϫ1.4 Ϫ0.5 Ϫ0.9 Ϫ1.1 Ϫ1.2 Memo items: GDP East Asia, excluding China 4.8 6.1 5.4 5.7 5.9 5.9 6.2 China 10.4 10.1 10.4 11.1 11.3 10.8 10.5 Indonesia 4.2 5.1 5.7 5.5 6.3 6.3 6.5 Thailand 4.5 6.2 4.5 5.0 4.3 4.6 5.2 Source: World Bank. Note: — = not available. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. c. Measured in U.S. dollars. d. GDP measured at purchasing power parity exchange rates. e. Exports and imports of goods and nonfactor services. 166 R E G I O N A L E C O N O M I C P R O S P E C T S In China, growth continued at a robust expected to register 6.7 percent. The country pace in 2007, underpinned by strong contri- is beginning to enjoy the benefits stemming butions to GDP from net exports and by from the substantial fiscal adjustment, public buoyant domestic demand, led by investment. debt reductions, and balance-of-payments Growth achieved a 11.5 percent run-up in the surpluses of recent years. The current account first half of the year, including an exceptional surplus rose sharply as a result of large remit- 11.9 percent advance during the second quar- tance inflows and a diminishing trade deficit. ter. The soaring current account surplus of Foreign direct investment (FDI) inflows in- about $380 billion in 2007, some 12 percent creased 70 percent from 2006 to $1.6 billion of GDP, is adding to domestic liquidity and in the first half of the year, while international contributing to asset price increases, while reserves have increased to some $30.7 billion, supporting, along with other factors such as enough to cover 5.5 months of imports. sharp gains in food prices, an upward drift in In Thailand, where continuing political and consumer price inflation. policy uncertainties have significantly damp- Elsewhere investment growth picked up ened business and consumer confidence, GDP in most economies, as capacity utilization is anticipated to grow by 4.3 percent in 2007, reached high levels, corporate profits rose, down from 5 percent in 2006. Growth has and the health of balance sheets improved. In relied on conditions in the external environ- Indonesia, fixed investment surged 11.3 per- ment, where the news is somewhat discourag- cent (seasonally adjusted annual rate) in the ing, given an 11 percent appreciation of the second quarter, and GDP growth increased to baht against the dollar over 2007 to date and 6.3 percent, up from 5.5 percent in 2006. sluggish conditions in the U.S. market. Against this background, inflation is now a Growth has also continued to run at strong growing concern, reaching 6.9 percent in 7 to 10 percent rates in several low-income September (year-on-year), at the upper end of economies of the region, including Cambodia, the central bank’s target range. GDP growth the Lao People’s Democratic Republic, should register a solid 6.3 percent for the year. Mongolia, and Vietnam, powered by across- Malaysia suffered subpar export perfor- the-board strength in exports and domestic mance during the first half of 2007, tied in demand. Growth is also above historical rates part to sluggish demand for semiconductors in some of the small island states of the region, and other high-tech inputs, slow hydrocarbon pushed up by high commodity prices, and in shipments, and difficulties in several ex- some cases by improved economic manage- portable food and raw material commodities. ment. At the same time, political instability Export growth declined to 2.5 percent in the and social tensions continue to undermine first half of 2007, down from 6 percent in the performance in some of the Pacific islands, second half of 2006, contributing to a slow- including Fiji, where GDP is expected to down in GDP growth to 5.6 percent in the contract this year. first half of the year. Equity markets were de- pressed for a short time during the period of Medium-term outlook global financial stress, but have bounced back Growth in East Asia and the Pacific is pro- sharply since mid-August. Domestic demand jected to remain strong, with GDP easing by is expected to sustain growth, offsetting weak- just 0.3 percentage points to 9.7 percent in ness in trade and allowing Malaysia to register 2008 and retaining strength in 2009 with an 5.7 percent GDP growth for 2007. advance of 9.6 percent. Growth in China is In the Philippines, GDP growth ramped up expected to slow modestly, dropping less than to 7.3 percent during the first half of 2007 a percentage point over the period to 10.5 per- based on strong investment outlays and a cent by 2009, as authorities’ long-standing at- pickup in services; growth for the year is tempts to rein in certain investment projects 167 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table A2 East Asia and Pacific country forecasts (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 Cambodia GDP at market pricesb — 10.0 13.5 10.8 9.5 8.0 9.0 Current account balance/GDP (%) — Ϫ3.7 Ϫ7.1 Ϫ5.8 Ϫ7.8 Ϫ11.2 Ϫ9.0 China GDP at market pricesb 10.4 10.1 10.4 11.1 11.3 10.8 10.5 Current account balance/GDP (%) 1.5 3.6 6.9 9.4 11.9 10.3 9.1 Fiji GDP at market pricesb 2.1 5.3 0.7 3.6 Ϫ3.1 1.9 2.8 Current account balance/GDP (%) Ϫ3.1 Ϫ16.8 Ϫ22.7 Ϫ22.2 Ϫ20.1 Ϫ24.0 Ϫ26.2 Indonesia GDP at market pricesb 4.2 5.1 5.7 5.5 6.3 6.3 6.5 Current account balance/GDP (%) Ϫ0.4 0.6 0.4 3.1 2.7 1.5 0.9 Lao People’s Democratic Republic GDP at market pricesb — 6.4 7.1 7.6 7.1 7.9 7.5 Current account balance/GDP (%) — Ϫ6.3 Ϫ26.4 Ϫ18.7 Ϫ16.8 Ϫ19.0 Ϫ19.0 Malaysia GDP at market pricesb 7.1 7.2 5.0 5.9 5.7 5.9 6.0 Current account balance/GDP (%) Ϫ0.4 12.6 15.3 17.1 13.8 12.2 10.2 Papua New Guinea GDP at market pricesb 4.8 2.7 3.4 2.6 5.2 4.0 4.2 Current account balance/GDP (%) 2.2 Ϫ1.5 2.6 4.4 2.7 3.6 2.8 Philippines GDP at market pricesb 3.0 6.2 4.9 5.4 6.7 6.2 6.5 Current account balance/GDP (%) Ϫ3.1 1.9 2.0 5.3 4.3 2.4 1.8 Thailand GDP at market pricesb 4.5 6.2 4.5 5.0 4.3 4.6 5.2 Current account balance/GDP (%) Ϫ1.2 1.7 Ϫ4.6 1.6 2.4 1.4 1.5 Vanuatu GDP at market pricesb 4.1 4.0 6.5 7.2 5.0 5.0 5.0 Current account balance/GDP (%) Ϫ8.2 Ϫ19.7 Ϫ20.2 Ϫ22.1 Ϫ19.9 Ϫ20.8 Ϫ20.4 Vietnam GDP at market pricesb 7.6 7.7 8.4 8.2 8.3 8.2 8.3 Current account balance/GDP (%) Ϫ5.1 Ϫ1.0 Ϫ0.3 1.1 Ϫ1.1 Ϫ0.6 Ϫ1.8 Source: World Bank. Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other World Bank documents. American Samoa, Dem. Rep., the Federated States of Micronesia, Kiribati, Korea, Northern Mari- ana Islands, Marshall Islands, Mongolia, Myanmar, Palau, Solomon Islands, Timor-Leste, and Tonga are not forecast because of data limitations. — ϭ not available a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. and to avoid overheating in several sectors A projected slowdown in export growth come to fruition (table A2 and figure A3). from 17.8 percent in 2007 to 15.2 percent in Substantial reform efforts in several countries 2008 echoes a softening in demand by coun- of the Association of Southeast Asian Nations tries of the Organisation for Economic should yield acceleration in activity through Co-operation and Development (OECD)— the forecast period. Growth among East Asian with U.S. imports increasing by a meager economies other than China is expected to 1.3 percent—as well as second-round effects register 6.2 percent by 2009. on intraregional trade. However, the decline 168 R E G I O N A L E C O N O M I C P R O S P E C T S coming year. China should be well positioned Figure A3 Performance improves for to weather the continuing turmoil in financial East Asian countries other than China markets. The impact on Chinese financial in- GDP growth (percent change) China stitutions holding overseas collateralized debt 12 East Asia obligations and other U.S. mortgage-backed Excluding China securities appears likely to be small in relation 10 to the size of China’s economy and its huge in- ternational reserves ($1.4 trillion), but other 8 countries may be more vulnerable to effects flowing through both direct and indirect 6 channels. Should losses by large international insti- tutions mount to substantial levels, other in- 4 2005 2006 2007 2008 2009 vestments, including those in East Asia, could be called in an effort to rebalance portfolios Source: World Bank. and mitigate the effects on trading profits. Several countries in East Asia are exposed to this risk, particularly those that have been re- cipients of large capital inflows intermediated through the yen carry trade. Policy makers should not make a serious dent in regional will need to keep a close eye on the volume, GDP, and the contribution of net trade to direction, and volatility of short-term flows, growth is projected to fall only moderately, including those into local equity markets. from 3 percentage points in 2007 to 2.3 in Nevertheless the large holdings of foreign ex- 2008. Largely reflecting developments in change reserves and the current account sur- China, the momentum underlying fixed in- plus positions of most East Asian economies vestment begins to dissipate during 2008, eas- should provide a significant buffer and reduce ing from 11.3 percent in 2007 to 9.9 percent. macroeconomic vulnerability to a reversal in By 2009, the external environment is expected capital flows. to feature a revival in U.S. GDP growth com- The obverse of this risk is that interest rate plemented by recovery in Europe and Japan. reductions in high-income economies may OECD import demand is forecast to increase boost liquidity to the point of touching off an- from 5 percent in 2008 to 7.8 percent in 2009, other upward cycle in equities, including in and conditions in financial markets are ex- emerging markets, setting the stage for an pected to stabilize. even more pronounced adjustment later. Even in the absence of such a scenario, many economies in the region have been struggling Risks to curb liquidity growth caused by burgeoning The year 2008 will likely be challenging for current account surpluses and large-scale policy makers, with a large number of interre- buildup of reserves. If not managed properly, lated downside risks. These include the possi- excess liquidity could jeopardize price stabil- bility of a full-fledged recession in the United ity, form asset price bubbles, and expose a States, higher oil prices, and further escalation country to serious financial and macroeco- of turbulence in financial markets linked to nomic vulnerabilities. Finally, a slowdown in the U.S. subprime debacle. the high-income countries that is more severe Among principal concerns is the extent to than projected would subject many East Asian which both financial and real side effects of economies to a substantial downdraft in ex- the U.S. subprime crisis might increase in the port growth. 169 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Europe and Central Asia increase standards of living, are not without shadow costs. Capital inflows have created Recent developments challenges for macroeconomic management; GDP growth in the Europe and Central Asia inflation remains high relative to that in the region eased slightly, from 6.9 percent in 2006 Euro Area, making it more difficult for several to 6.7 percent in 2007, reflecting a modest soft- countries to maintain effective exchange rate ening of both external and domestic demand pegs; and current account deficits in many oil- (table A3). With a stable population in the re- importing countries have become unsustain- gion, this means that per capita production ably high. continued to increase at remarkable rates of At the subregional level, growth in Central more than 6 percent. High productivity gains and Eastern Europe (CEE) moderated to a still have been made possible by technology robust 6.0 percent in 2007 from 6.5 percent in diffusion, double-digit growth in investment 2006 (figure A4), buoyed by rapid growth supported by rapid credit expansion through in credit and in real wages, strong capital lending by domestic and foreign banks, high inflows, and high remittance inflows. The energy prices for hydrocarbon exporters, and falloff in growth in CEE is attributable in large large remittance inflows from workers over- measure to a slowdown in Hungary, where seas. These same factors have boosted private a program of fiscal consolidation pushed consumption and consistently raised import growth down 3.2 percentage points to 2.2 per- growth 3 or more percentage points above the cent in 2007. The decline in growth in CEE already robust expansion of exports. These de- also stems from continued moderation in velopments, which have helped to rapidly Table A3 Europe and Central Asia forecast summary (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 GDP at market pricesb Ϫ1.0 7.4 6.1 6.9 6.7 6.1 5.7 GDP per capitac Ϫ1.2 7.4 6.2 6.9 6.7 6.0 5.7 Purchasing Power Parity GDPd Ϫ0.9 7.6 6.1 7.1 7.0 6.2 5.8 Private consumption 0.5 8.6 7.8 7.4 7.3 6.9 6.8 Public consumption 0.1 2.3 3.4 5.0 4.5 5.4 3.4 Fixed investment Ϫ6.6 14.1 11.5 16.5 14.9 13.0 10.3 Exports, GNFSe 0.9 12.4 7.0 10.3 9.2 8.5 8.7 Imports, GNFSe Ϫ1.6 17.4 10.2 14.0 12.8 12.2 11.2 Net exports, contribution to growth 0.9 Ϫ1.7 Ϫ1.4 Ϫ1.8 Ϫ2.0 Ϫ2.3 Ϫ1.9 Current account balance/GDP (%) — 0.8 1.5 0.6 Ϫ1.3 Ϫ1.9 Ϫ2.6 GDP deflator (median, LCU) 118.5 6.6 5.8 7.3 6.9 6.4 5.5 Fiscal balance/GDP (%) Ϫ6.1 Ϫ0.7 2.0 2.9 1.6 1.6 1.5 Memo items: GDP Transition countries 2.0 6.9 5.7 6.3 5.7 5.5 5.3 Central and Eastern Europe 1.2 5.7 4.7 6.5 6.0 5.5 5.2 Commonwealth of Independent States Ϫ4.2 8.0 6.8 7.8 8.2 6.8 6.2 Russian Federation Ϫ3.9 7.1 6.4 6.7 7.5 6.5 6.0 Turkey 3.6 8.9 7.4 6.1 5.1 5.4 5.7 Poland 3.8 5.3 3.6 6.1 6.5 5.7 5.1 Source: World Bank. Note: — = not available. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. c. Measured in U.S. dollars. d. GDP measured at purchasing power parity exchange rates. e. Exports and imports of goods and nonfactor services. 170 R E G I O N A L E C O N O M I C P R O S P E C T S Figure A4 Mixed growth outturns across Figure A5 External positions vary widely Europe and Central Asia across Europe and Central Asia Current account balance as a percent of GDP (%) GDP growth (% year-on-year) 20 9.0 2007 15 2006 2005 10 7.5 5 0 6.0 Ϫ5 Ϫ10 2005 4.5 2006 Ϫ15 2007 Ϫ20 3.0 Ϫ25 a y d ta of Ea C sia d op d ke si an l A an In Com Eur l an us t S lth s e r ne ia n ia de n ry ta of nd Ea C al A and pe o ro d Tu l te tio ta Po tv an de m u an ga tra e R ai en ea n ra t S lth la an ekis us Uzb tes st en sia nd nw pe La en p ra kr om un Po tr e In Com rn E tral er t C uro en ea nd nw U st en en p H R C uro Fe E pe o E de m e si R Sources: World Bank and national agencies. Sources: World Bank and national agencies. Turkish GDP, which slowed by 1 percentage ranging from the equivalent of 4 percent of point to 5.1 percent in 2007 from an unsus- GDP to as much as 38 percent: Albania tainable 8.9 percent pace posted in 2004. (15 percent), Armenia (19 percent), Azerbaijan In contrast with CEE, growth in the Com- (4 percent), Georgia (7 percent), the Kyrgyz monwealth of Independent States (CIS) accel- Republic (12 percent), Moldova (38 percent), erated sharply from 7.8 percent in 2006 to and Tajikistan (20 percent). Remittances are 8.2 percent in 2007 (figure A4). A strong in- anticipated to maintain this strong level in crease in public consumption and investment, 2007. combined with a slightly improved contribu- Europe and Central Asia’s regional current tion from net exports, formed the foundation account position shifted to a modest deficit for this pickup in growth. Revenue gains for equivalent to 1.3 percent of GDP in 2007 after the oil-exporting economies, notably Azerbai- posting a surplus of 0.6 percent in 2006 (fig- jan, Kazakhstan, and the Russian Federation, ure A5) and an average surplus of nearly 1 continue at robust rates, given increasing oil percent of GDP over 2000–05. Strong domes- prices, and are providing ongoing support to tic demand is driving import volume growth demand growth through fiscal linkage. A con- of 12.8 percent, well in excess of exports at struction boom in residential, commercial, 9.2 percent. Sizable current account deficits and civil engineering (infrastructure) projects among countries in CEE have been financed to is contributing to a rise in the non-oil sectors. a large extent by FDI, although for the Baltic Among the smaller CIS economies, high states, foreign borrowing by banks has come worker remittance inflows, FDI, and vibrant to represent a substantial share of external fi- demand from regional oil exporters (notably nance, leading to higher external debt-to-GDP Russia) and from Asia (especially China) are ratios. In the case of Latvia, that ratio reached underpinning growth. Gross worker remit- 112 percent in 2006 and is projected to re- tances represented a substantial share of GDP main above 100 percent during 2007–09. for several of the region’s countries in 2006, Moreover, short-term debt as a share of total 171 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 external debt is high in a number of countries, fiscal surplus, which is equivalent to 5.0 per- reaching more than 40 percent in Latvia, cent of GDP, up from 0.1 percent in 2006. Lithuania, and the Slovak Republic. These in- Monetary policy across the region has dicators point to potential future problems become more restrictive to counter rising infla- with currency and maturity mismatches. tionary pressures. Price increases are stemming In the CIS, worker remittances have from sustained high domestic demand growth helped finance significant external deficits in and rising fuel and grain prices, the latter a number of smaller countries. In Kazakhstan aggravated locally by drought conditions in and the Kyrgyz Republic, external debt as a Bulgaria and Romania and globally by the share of gross national income stood at 83 surge in the use of cereals for biofuels. and 86 percent, respectively, in 2005, and in Moldova posted the largest escalation in prices. the case of Kazakhstan, this share has in- In Hungary and Latvia, prices were up 3 per- creased by 12 percentage points since 2001. centage points; inflation in Hungary is being Indeed, the rise in the international indebted- driven by increases in indirect taxes and ad- ness of Kazakh banks has recently focused ministered prices and in Latvia by rapid credit attention on the country, given the turbulence expansion tied to vibrant capital inflows. In in international financial markets. In the Kyrgyz Azerbaijan, inflation is expected to rise to Republic, debt burdens remain at high levels, 16 percent in 2007, double the rate of 2006; in but they have been reduced sharply since Ukraine and Uzbekistan inflation is expected to 2000—by more than 50 percentage points as average 17.5 and 17.0 percent, respectively. a share of gross national income—largely be- In several countries, however, inflationary cause of debt rescheduling by the Paris Club pressure has eased. In Romania, consumer in 2002 and an improvement in debt man- prices fell from 6.6 percent during 2006 agement strategy. to 4.6 percent in 2007, thanks to currency Fiscal positions in the region generally appreciation and a delay in regulated price deteriorated in 2007, with the largest shifts adjustments. The Slovak Republic is also pro- posted in the CIS. The most notable decline jected to see an easing of inflation of some has been in Tajikistan, where the fiscal bal- 2 percentage points. Tighter domestic condi- ance shifted from a surplus of 1.6 percent of tions and exchange rate appreciation helped GDP in 2006 to a deficit of 10.3 percent. This moderate inflationary pressures in Croatia, reflects, in part, an effort to offset weakening Kazakhstan, and Turkey during the year. exports to sustain domestic consumption and Nonetheless, inflation pressures are expected investment. Marked deteriorations in fiscal to rekindle, in part reflecting higher food positions of 2 percentage points or more prices and energy costs, which are affecting a during 2007 have been recorded in Belarus wide spectrum of countries. (2.0 points), Bosnia and Herzegovina The impact of market turbulence tied to the (3.4 points), Kazakhstan (3.0 points), Russia U.S. subprime mortgage market has been fairly (2.2 points), and Turkey (3.4 points). In con- limited in the region, and initial downside ad- trast, notable consolidation has been achieved justments in currency and asset prices have in Hungary, where the austerity program re- largely been recouped. Bond spreads increased, duced the deficit from 9.2 percent of GDP in but not as much as in other markets. Never- 2006 to 6.4 percent. Firming government rev- theless, concerns about potential spillovers re- enues underpinned by stronger than expected main for a number of countries in the region, GDP growth helped manage a reduction of particularly those that have experienced rapid Poland’s deficit from 3.9 percent of GDP in credit growth and private sector borrowing 2006 to 3.0 percent in 2007. In Azerbaijan, from abroad, the proportions of which may increasing oil revenues and new productive be underestimated. Signs of overheating are capacity have led to a considerable rise in the clearly evident in Bulgaria and the Baltic states, 172 R E G I O N A L E C O N O M I C P R O S P E C T S where already worrisome external positions spill over to the region both directly and also have deteriorated even further during 2007. indirectly through a faltering of external Given that foreign inflows are financing much demand. Slower growth in the OECD coun- of the credit expansion in these economies, in- tries, especially in Germany and the Euro creased market volatility points to heightened Area, may dampen export growth for CEE concerns in relation to currency mismatches, during the year. Difficulties among European sudden stops, and contagion. A potential ex- financial institutions would also have reper- change rate risk is present in a number of coun- cussions throughout Europe and Central Asia. tries where loans denominated in foreign cur- Domestic demand growth is anticipated to rencies make up a large share of total loans by moderate from recent highs, with the contri- domestic banks. In the Baltic states, Hungary, bution to growth from both private consump- Kazakhstan, Romania, and Ukraine, this ratio tion and investment projected to fall by was 40 percent or more in 2006, and in the 0.2 percentage points during 2008. The con- case of Latvia, the share increased by more tribution of trade to growth—reflecting weak- than 15 percentage points since 2001 to nearly ened external demand, and despite a degree 80 percent in 2006. of softening import growth—is expected to become still more negative in 2008. Three notable exceptions to the projected Medium-term outlook growth slowdown in 2008 are Albania, Hun- From GDP gains of 6.7 percent in 2007, gary, and Turkey. In Albania, continued strong growth is projected to continue easing, falling domestic demand is expected to help firm up off to 6.1 percent in 2008 and to 5.7 percent growth. A key component of that demand is in 2009 (tables A3 and A4, figure A6). The increased public investment to mitigate the slowdown in 2008 is expected to be wide- power shortages that have created a bottle- spread across countries in the region, given neck to growth. In Hungary and Turkey, im- heightened risk aversion and volatility on in- provements in domestic conditions should ternational financial markets, which could permit additional easing of monetary policy, bolstering demand sufficiently to bring about a pickup in GDP growth. By 2009, external demand is projected to Figure A6 Growth in Europe and Central strengthen in concert with GDP growth in the Asia eases into 2009 OECD, leading to an improvement in contri- Real GDP (annual percent change) butions to growth from net exports, equiva- Forecast 10 Europe and lent to 1.9 percentage points in 2009 (follow- Central Asia ing a drop by 2.3 percentage points in 2008). 8 6 A further falloff in domestic demand growth; 4 particularly the investment in the CIS coun- tries, is projected to offset this improvement 2 somewhat, resulting in modest deceleration in 0 regional growth to 5.7 percent in 2009. In Ϫ2 large measure, the projected slowdown in the Ϫ7.5 CIS is driven by the near completion of major Ϫ4 hydrocarbon investment projects that led to 01 00 02 03 04 05 06 07 08 09 20 20 20 20 20 20 20 20 20 20 the expansion of production and export Central and Eastern Europe Turkey capacity in recent years. Commonwealth of Independent States Despite a rise in external demand and con- Source: World Bank. tinued moderation in domestic demand, the regional current account is anticipated to 173 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table A4 Europe and Central Asia country forecasts (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 Albania GDP at market pricesb 1.4 5.9 5.5 5.0 5.5 6.0 6.2 Current account balance/GDP (%) Ϫ5.6 Ϫ4.8 Ϫ7.8 Ϫ7.2 Ϫ8.4 Ϫ8.4 Ϫ8.0 Armenia GDP at market pricesb Ϫ3.8 10.5 13.9 13.3 11.0 8.5 7.5 Current account balance/GDP (%) Ϫ12.0 Ϫ4.5 Ϫ4.4 Ϫ4.7 Ϫ5.7 Ϫ5.6 Ϫ4.8 Azerbaijan GDP at market pricesb Ϫ5.2 10.2 26.4 34.5 33.5 19.4 14.9 Current account balance/GDP (%) Ϫ15.8 Ϫ29.8 1.3 18.2 24.2 31.6 33.3 Belarus GDP at market pricesb Ϫ1.2 11.4 9.4 9.9 7.8 6.4 5.7 Current account balance/GDP (%) — Ϫ5.2 1.8 Ϫ4.1 Ϫ8.0 Ϫ8.4 Ϫ8.3 Bulgaria GDP at market pricesb Ϫ1.7 5.7 5.5 6.3 6.1 6.0 5.2 Current account balance/GDP (%) Ϫ2.3 Ϫ6.9 Ϫ12.2 Ϫ15.8 Ϫ19.2 Ϫ18.1 Ϫ17.3 Croatia GDP at market pricesb Ϫ1.5 3.8 4.3 4.8 5.8 4.9 4.5 Current account balance/GDP (%) 1.1 Ϫ5.2 Ϫ6.7 Ϫ7.7 Ϫ8.4 Ϫ8.0 Ϫ7.9 Georgia GDP at market pricesb Ϫ9.3 5.9 9.6 9.8 10.0 9.0 8.0 Current account balance/GDP (%) — Ϫ8.3 Ϫ9.8 Ϫ13.8 Ϫ15.0 Ϫ14.1 Ϫ12.0 Hungary GDP at market pricesb 0.8 5.2 6.0 5.4 2.2 3.1 3.8 Current account balance/GDP (%) Ϫ5.4 Ϫ8.5 Ϫ6.8 Ϫ5.7 Ϫ4.2 Ϫ5.0 Ϫ5.9 Kazakhstan GDP at market pricesb Ϫ3.6 9.6 9.7 10.7 8.5 7.1 6.4 Current account balance/GDP (%) Ϫ1.8 0.8 Ϫ1.9 Ϫ2.2 Ϫ2.0 Ϫ4.6 Ϫ7.7 Kyrgyz Republic GDP at market pricesb Ϫ4.0 7.0 Ϫ0.6 2.7 7.5 7.0 6.7 Current account balance/GDP (%) Ϫ10.6 Ϫ4.6 Ϫ9.3 Ϫ6.6 Ϫ17.9 Ϫ15.1 Ϫ12.2 Lithuania GDP at market pricesb Ϫ3.3 7.0 7.5 7.4 7.8 6.8 6.0 Current account balance/GDP (%) Ϫ5.9 Ϫ7.7 Ϫ7.1 Ϫ10.8 Ϫ13.3 Ϫ13.6 Ϫ12.3 Latvia GDP at market pricesb Ϫ2.8 8.6 10.2 11.9 9.7 7.4 6.4 Current account balance/GDP (%) Ϫ1.6 Ϫ12.9 Ϫ12.7 Ϫ21.4 Ϫ22.7 Ϫ19.5 Ϫ15.3 Moldova GDP at market pricesb Ϫ9.8 7.4 7.5 4.0 6.0 6.8 7.0 Current account balance/GDP (%) — Ϫ2.2 Ϫ9.0 Ϫ9.3 Ϫ8.0 Ϫ14.9 Ϫ12.7 Macedonia, FYR GDP at market pricesb Ϫ0.9 4.1 4.1 3.0 5.0 5.0 5.5 Current account balance/GDP (%) — Ϫ8.0 Ϫ1.5 Ϫ0.4 Ϫ2.9 Ϫ5.0 Ϫ6.1 Poland GDP at market pricesb 3.8 5.3 3.6 6.1 6.5 5.7 5.1 Current account balance/GDP (%) Ϫ3.5 Ϫ4.2 Ϫ1.9 Ϫ2.4 Ϫ4.3 Ϫ5.3 Ϫ5.7 Romania GDP at market pricesb Ϫ1.7 8.4 4.1 7.7 6.1 5.9 5.5 Current account balance/GDP (%) Ϫ4.8 Ϫ8.5 Ϫ8.7 Ϫ10.5 Ϫ13.9 Ϫ15.3 Ϫ14.9 Russian Federation GDP at market pricesb Ϫ3.9 7.1 6.4 6.7 7.5 6.5 6.0 Current account balance/GDP (%) — 10.0 11.1 9.7 5.7 4.3 2.2 174 R E G I O N A L E C O N O M I C P R O S P E C T S Table A4 (continued ) (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 Slovak Republic GDP at market pricesb 0.3 5.2 6.6 8.8 8.7 7.1 6.8 Current account balance/GDP (%) — Ϫ3.1 Ϫ8.4 Ϫ8.0 Ϫ4.3 Ϫ3.5 Ϫ3.1 Turkey GDP at market pricesb 3.6 8.9 7.4 6.1 5.1 5.4 5.7 Current account balance/GDP (%) Ϫ1.1 Ϫ5.2 Ϫ6.2 Ϫ8.1 Ϫ7.5 Ϫ7.7 Ϫ7.6 Ukraine GDP at market pricesb Ϫ8.0 12.1 2.7 7.1 6.3 5.5 5.0 Current account balance/GDP (%) — 10.7 2.9 Ϫ1.5 Ϫ3.6 Ϫ6.5 Ϫ7.4 Uzbekistan GDP at market pricesb Ϫ0.2 7.7 7.0 7.3 7.7 5.0 5.0 Current account balance/GDP (%) — 10.1 14.9 18.7 14.3 11.9 8.7 Source: World Bank. Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other World Bank documents. Bosnia and Herzegovina, Serbia and Montenegro, Tajikistan, and Turkmenistan are not forecast because of data limitations. — = not available. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. continue to deteriorate through 2009, largely share common creditors and investors, appears because of declines in the terms of trade for to expose them to higher contagion risk in the hydrocarbon-exporting countries as oil prices event of a nondiscriminatory pullout, similar to begin to soften. Inflationary pressures are what occurred in East Asia in 1997. In particu- likely to ease over the medium term, with lar, large current account deficits (equivalent to median GDP inflation coming down from about 12 percent or more as a share of GDP) 6.9 percent in 2007 to 6.4 percent in 2008 and in Bulgaria, Georgia, Latvia, Lithuania, and 5.5 percent in 2009. This decline is tied to Romania remain a concern. generally tighter credit conditions in both in- Risks to growth are also associated with ternational and domestic markets. However, the slowing of reform momentum in the new this somewhat sanguine picture masks an ex- EU member states and other countries in CEE. pected rise in inflation pressures in Belarus In the CIS, slow progress with economic re- and Georgia and slower progress toward sta- forms and only gradual diversification from bilization of consumer price inflation among commodity market dependence remain a con- oil exporters (as well as in Moldova and cern, pointing to slower medium-term growth Ukraine) because of strong demand pressures. prospects. And a more protracted workout of Among the new EU member countries, only the housing situation in the United States and the Slovak Republic is anticipated to join the associated financial distortions there and in Euro Area in the coming years following other OECD markets present a substantial Slovenia’s entry in 2007. downside risk. Higher than anticipated oil prices also pre- Risks sent risk for energy-importing countries in the Downside risks to regional growth are tied to form of higher import bills and increased in- potential overheating and a sudden unwinding flationary pressures. With respect to the latter, of large external imbalances. The presence of while countries with free-floating currency large foreign banks in several countries in the regimes in CEE have direct policy levers to region, and the fact that many of these countries manage inflationary pressures, those with 175 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 currencies pegged to the euro, such as the Baltic states and Bulgaria, have more limited Figure A7 Growth outturns were mixed across Latin America in 2007 options. Higher than projected grain prices could also lead to increased inflationary pres- GDP growth (percent) 10 sures, particularly among the low-income countries, where food expenditures represent 2007 a large share of consumption. 8 2006 Despite gains in a number of Millennium 2005 Development Goal indicators, some countries 6 in the region, particularly in Central Asia and the Caucasus, have shown regressing trends 4 and slower progress toward achieving the goals. The Caucasus have met the goals 2 related to carbon emissions and primary edu- o an a be ca a il ic ic in az ib ri be C n ex er nt ar e a cation, but concerns remain about the nonin- Br m C Am ge ib M ar lA Ar th atin tra come poverty indicators, such as malnutrition, en L e C access to tertiary education, HIV/AIDS, the d environment, and soil and water management. an Sources: World Bank and national agencies. Latin America and markets. This positive external situation has the Caribbean underpinned government finances by boosting Recent developments revenues that, despite a significant increase in Marking the fourth consecutive year of sus- public spending, limited the region’s primary tained advances, GDP growth in Latin Amer- deficit to 0.3 percent of GDP in 2007, from ica and the Caribbean registered 5.1 percent in 0.5 percent the previous year. 2007, following a 5.6 percent gain in 2006. Monetary authorities, helped by stronger The average yearly rate of output growth since fiscal positions and supportive exchange rates, 2004 has been 5.3 percent, twice the 2.7 per- have been able to achieve inflation targets in cent registered during the previous 15 years. most countries (figure A8). Excluding Argentina Recent growth has been more broadly based, and the República Bolivariana de Venezuela, with positive results shared by all subregions: average consumer price inflation was stable in the Caribbean, Central America, and South 2007 at 5.7 percent after declining by almost America. A favorable external environment 1.0 percentage point in 2006. Only one coun- together with improved domestic macro- try in the region has experienced inflation economic conditions helped strengthen above 10 percent in each of the last five years. fundamentals and enhanced growth and stabil- The recent turmoil in financial markets that ity (figure A7). originated in the U.S. subprime mortgage market During 2006, the region recorded large cur- appears to have had limited effects on the region rent account surpluses, which have diminished to date. Spreads have increased, though capital to a degree in 2007. Growing foreign exchange flows have continued (figure A9). Indeed, growth revenues made up of export earnings linked to in 2007 continued to be strong, and although any high commodity prices for food, metals, and sharp slowdown in the United States would even- energy and continued large FDI; portfolio in- tually affect Latin American and the Caribbean vestment; and remittance flows have all con- prospects, the region seems better prepared for tributed to the maintenance of high levels of exogenous shocks than it was during earlier foreign reserves and helped support equity periods of crisis or financial dislocation. 176 R E G I O N A L E C O N O M I C P R O S P E C T S line with expectations of additional easing in Figure A8 Latin American inflation inflation. Following the credit crisis in the eases over the last 15 years United States, the exchange rate of the Brazil- Median consumer price inflation in the seven largest Latin ian real had depreciated from R/$1.86 in mid- American countries (percent change) 45 July to R/$2.06 in mid-August. The currency 40 had fully recovered and appreciated further Median against the U.S. dollar to R/$1.78 by the end of 35 30 November, a move of 9.5 percent. Ample inter- Average 1990–98 25 national reserves, a continuing current account 20 surplus, and other strong macroeconomic 15 fundamentals suggest increased resilience. In Average 2003–07 10 2007, Chile resumed rapid 5.7 percent growth 5 at the same level as in 2005 despite a dip to Average 1999–2002 0 4 percent in 2006 caused by the delayed 90 92 94 96 98 00 02 04 06 effects of monetary tightening, countercyclical 19 19 19 19 19 20 20 20 20 fiscal policy, mining stoppages, and energy Source: World Bank. constraints. In Mexico, despite uncertainties surround- ing the presidential election during the first Figure A9 Latin America and the half of 2007, investment demand rose 10.3 Caribbean sovereign bond spreads percent. High oil prices supported export rev- decline, then increase again enues, which offset increased spending on im- Basis points ports and helped contain the trade deficit to 325 Emerging markets bond index global $13 billion, up from $6 billion in 2006. De- 300 275 spite the positive performance of investment, Latin America and 250 the Caribbean private consumption, and manufacturing 225 output in the first half of 2007, concerns 200 175 regarding a weakening U.S. economy and its 150 repercussions for Mexico have mounted be- 125 Brazil cause of the trade and financial links, includ- 100 75 Mexico ing migrants’ remittance flows, between Mex- ico and its northern neighbor. Mexico’s GDP is 07 7 7 07 07 7 7 7 07 00 00 00 00 00 20 20 20 20 anticipated to grow by 2.9 percent for the year. ,2 ,2 ,2 ,2 ,2 3, 1, 2, 8, 30 .2 11 21 .9 .2 1 .1 ay n ct g. b. n. l. ar ov Ja Growth in Colombia and Peru has been Ju O M Au Fe Ju M N Source: JPMorgan-Chase. above the regional average thanks to sustained strength in investment, which was up 18 per- cent in Colombia and 19 percent in Peru dur- This broadly positive picture for the region ing 2006. Investment has been led by the pri- is qualified by substantial variations from vate sector, with foreign companies playing an country to country. Between 2005 and 2007, important role. The improved security situa- Brazil, which accounts for about one-third of tion in Colombia and several massive projects the region’s GDP, stepped up growth by al- in the mining and energy sectors in Peru have most 1 percentage point a year. Significant attracted investors, and FDI has risen consid- monetary policy easing has been a key factor erably. These factors will continue to support behind increasing private demand, which to- the pace of economic activity in 2007 at rates gether with higher public spending, has of 6.5 for Colombia and 7.5 percent for Peru. boosted GDP growth. The policy interest rate Central American countries have also per- was reduced further in the first half of 2007 in formed exceptionally well in recent years. 177 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Average growth for the aggregate of Costa In the República Bolivariana de Venezuela, Rica, El Salvador, Guatemala, Honduras, massive oil earnings have continued to finance Nicaragua, and Panama has amounted to 5.5 large and procyclical government spending. percent over 2004–07, the strongest since the These outlays supported growth of 8.3 per- early 1990s. Strong remittance inflows and cent in 2007, down 2 percentage points from the recent implementation of the Dominican the previous year. Apart from a clear accelera- Republic–Central American Free-Trade tion in inflation, substantial export revenues Agreement (a bilateral free trade agreement have masked the adverse effects of increased between the United States, Central America, state intervention on the economy. Significant and the Dominican Republic) have under- declines in oil prices or oil production could pinned increasing consumer and business con- lead to large liquidity problems in the future, fidence and domestic spending. By increasing especially in light of the increased spending, exports of manufactured goods to the United including spending on nationalized enterprises States, this agreement is helping Central and numerous social programs. America reduce export market losses in the The outcomes of seven presidential elec- garment sector resulting from the expiration tions held in the region during 2006 did not of the Multi-Fiber Agreement and increased result in major shifts in macroeconomic policy competition from China. for the region as a whole. However, policy in Growth in Argentina has been easing Argentina, Bolivia, the República Bolivariana gradually from extremely high rates. GDP de Venezuela, and more recently Ecuador and increased 7.8 percent in 2007, down from Nicaragua is now more oriented toward an in- 8.5 percent in 2006. The prolonged expansion creasing role for the state in the economy. in Argentina can be explained in part by an un- dervalued real exchange rate, an expansionary Medium-term outlook fiscal policy, and an accommodative monetary Regional GDP is expected to slow further in stance. Contrasted with the experience of the years ahead, coming in at 4.5 percent in Brazil, where the currency appreciated and 2008 and at 4.3 percent in 2009 (figure A10). fiscal deficits contracted, in Argentina, inter- This measured slowdown is supported by con- vention in the foreign exchange market has tinued strong growth in Brazil and a rebound prevented nominal appreciation, while steril- from a weak 2007 for Mexico. Growth in ization operations have contained expansion other countries—notably Argentina and the of the monetary base. Argentina has also put República Bolivariana de Venezuela—is likely a series of supplementary measures in place to slow. Excluding those two countries, re- to suppress inflation (actual levels of infla- gional GDP growth is expected to moderate tion remain unclear given the lack of trans- only marginally from 4.4 percent in 2007 to parency in official consumer price inflation 4.2 percent in 2008—because of weakness in calculations): the government raised export the United States—before picking up to 4.3 per- taxes on food and fuel and imposed direct cent in 2009. controls on basic consumer prices, formal Should these outturns be realized, they wages, and the tariffs on most energy prod- would represent the longest positive growth ucts and public services. Despite massive rev- spell for Latin America since the 1960s. De- enue growth, the government’s fiscal policy spite a gradual worsening of current account has been procyclical (increasingly so in the balances due to stabilizing commodity prices first half of 2007). Were external conditions and slower growth in global demand, this to deteriorate, Argentina would have little stronger growth is likely to persist, supported margin to devalue the real exchange rate fur- by continued expansion in consumption ther or to contract its fiscal surplus in a and investment and buoyed by an environ- meaningful way. ment of low inflation (excluding Argentina 178 R E G I O N A L E C O N O M I C P R O S P E C T S and the República Bolivariana de Venezuela); Figure A10 Growth in Latin America and improved fiscal policy (particularly in Mexico); the Caribbean eases into 2009 and continued strong capital inflows (espe- Real GDP (annual percent change) Forecast cially to Brazil). 10 Among various groupings of Latin Ameri- Latin America and can economies, a number of themes emerges. 8 the Caribbean Growth among agricultural exporters is ex- 6 pected to slow from 7.1 percent in 2007 to 4.6 by 2009. However, if Argentina—where 4 growth is expected to slow to more sustain- able rates—is excluded from the group, the 2 deceleration is less marked, from 5.0 percent 0 in 2007 to 4.5 in 2009. Growth among metals exporters is projected to remain buoyant, eas- Ϫ2 ing from 5.1 percent in 2007 to 4.7 percent by 2009, in large part because of expansionary 00 01 02 03 04 06 08 09 05 07 20 20 20 20 20 20 20 20 20 20 policies in Brazil and Chile. Growth among North and Central America South America energy exporters is expected to slow gradually, Caribbean from 5.2 percent in 2007 to 4.4 percent in Source: World Bank. 2008, easing further to 4.2 percent in 2009 as oil prices begin to soften. A reduced pace Table A5 Latin America and the Caribbean forecast summary (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 GDP at market pricesb 3.4 5.9 4.6 5.6 5.1 4.5 4.3 GDP per capitac 1.7 4.6 3.3 4.3 3.8 3.2 3.0 Purchasing Power Parity GDPd 4.3 5.6 4.5 5.4 5.1 4.6 4.4 Private consumption 3.4 4.9 5.2 6.2 5.7 4.9 4.6 Public consumption 1.5 1.7 3.2 3.3 4.2 3.0 2.8 Fixed investment 4.7 9.7 9.7 12.2 10.2 9.5 8.2 Exports, GNFSe 8.1 12.5 8.6 7.8 4.7 5.5 5.8 Imports, GNFSe 10.7 15.2 12.2 13.6 9.4 9.5 8.4 Net exports, contribution to growth Ϫ0.3 Ϫ0.4 Ϫ0.7 Ϫ1.4 Ϫ1.3 Ϫ1.2 Ϫ0.9 Current account balance/GDP (%) Ϫ2.8 1.0 1.4 1.6 0.5 0.1 Ϫ0.2 GDP deflator (median, LCU) 10.9 7.2 6.6 10.0 8.7 5.1 4.2 Fiscal balance/GDP (%) — 0.0 Ϫ0.7 Ϫ0.5 Ϫ0.3 Ϫ0.9 Ϫ1.1 Memo items: GDP LAC excluding Argentina 3.2 5.5 3.9 5.1 4.7 4.3 4.3 Central America 3.6 4.1 3.0 4.9 3.2 3.4 3.8 Caribbean 3.6 2.6 6.7 8.8 5.5 5.2 5.0 Brazil 2.7 4.9 2.9 3.7 4.8 4.5 4.5 Mexico 3.5 4.1 2.8 4.8 2.9 3.2 3.6 Argentina 4.5 9.0 9.2 8.5 7.8 5.7 4.7 Source: World Bank. Note: — = not available. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. c. Measured in U.S. dollars. d. GDP measured at purchasing power parity exchange rates. e. Exports and imports of goods and nonfactor services. 179 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table A6 Latin America and the Caribbean country forecasts (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 Argentina GDP at market pricesb 4.5 9.0 9.2 8.5 7.8 5.7 4.7 Current account balance/GDP (%) Ϫ2.9 1.9 2.8 3.4 2.2 2.0 1.3 Antigua and Barbuda GDP at market pricesb 3.3 4.3 5.3 11.5 5.0 4.4 4.2 Current account balance/GDP (%) Ϫ6.0 Ϫ11.9 Ϫ8.7 Ϫ16.0 Ϫ16.6 Ϫ17.6 Ϫ16.3 Belize GDP at market pricesb 5.9 4.6 3.1 5.6 3.5 3.3 3.4 Current account balance/GDP (%) Ϫ7.3 Ϫ14.4 Ϫ14.6 Ϫ1.9 Ϫ4.4 Ϫ6.5 Ϫ5.7 Bolivia GDP at market pricesb 3.8 3.9 4.1 4.6 4.1 4.4 4.2 Current account balance/GDP (%) Ϫ6.1 3.9 5.4 11.8 9.2 8.4 7.9 Brazil GDP at market pricesb 2.7 4.9 2.9 3.7 4.8 4.5 4.5 Current account balance/GDP (%) Ϫ2.1 1.9 1.7 1.4 0.7 Ϫ0.1 Ϫ0.2 Chile GDP at market pricesb 6.4 6.2 5.7 4.0 5.7 5.1 5.0 Current account balance/GDP (%) Ϫ2.7 2.2 1.1 4.0 4.0 1.6 0.8 Colombia GDP at market pricesb 2.5 4.8 4.7 6.8 6.5 5.3 4.8 Current account balance/GDP (%) Ϫ1.9 Ϫ0.9 Ϫ1.6 Ϫ1.5 Ϫ1.6 Ϫ1.1 Ϫ1.0 Costa Rica GDP at market pricesb 5.2 4.1 5.9 8.2 6.1 5.0 4.9 Current account balance/GDP (%) Ϫ3.6 Ϫ4.3 Ϫ4.9 Ϫ4.9 Ϫ4.8 Ϫ5.4 Ϫ5.0 Dominica GDP at market pricesb 1.8 3.2 3.4 4.1 3.2 3.1 3.0 Current account balance/GDP (%) Ϫ16.6 Ϫ19.5 Ϫ28.8 Ϫ18.4 Ϫ19.2 Ϫ20.6 Ϫ20.7 Dominican Republic GDP at market pricesb 6.0 2.0 9.3 10.7 7.2 5.4 4.8 Current account balance/GDP (%) Ϫ3.2 5.7 Ϫ2.0 Ϫ2.6 Ϫ2.9 Ϫ3.8 Ϫ4.2 Ecuador GDP at market pricesb 1.8 7.9 4.7 4.1 2.4 2.5 2.7 Current account balance/GDP (%) Ϫ2.3 Ϫ1.7 0.8 3.5 1.6 2.9 2.3 El Salvador GDP at market pricesb 4.6 1.8 3.1 4.2 4.2 3.8 4.0 Current account balance/GDP (%) Ϫ2.0 Ϫ4.0 Ϫ5.4 Ϫ4.7 Ϫ5.2 Ϫ6.1 Ϫ5.7 Guatemala GDP at market pricesb 4.1 2.7 3.2 4.6 5.0 4.6 5.0 Current account balance/GDP (%) Ϫ4.6 Ϫ4.4 Ϫ4.4 Ϫ4.3 Ϫ4.1 Ϫ5.3 Ϫ5.0 Guyana GDP at market pricesb 4.9 3.3 Ϫ1.9 4.7 4.5 3.7 3.5 Current account balance/GDP (%) Ϫ15.1 Ϫ2.5 Ϫ12.0 Ϫ26.6 Ϫ21.2 Ϫ22.8 Ϫ16.4 Honduras GDP at market pricesb 3.3 5.0 4.1 6.0 6.0 5.5 4.7 Current account balance/GDP (%) Ϫ7.7 Ϫ5.7 Ϫ1.4 Ϫ1.9 Ϫ4.9 Ϫ5.0 Ϫ5.2 Haiti GDP at market pricesb Ϫ1.3 Ϫ2.2 2.0 2.3 3.5 3.8 4.0 Current account balance/GDP (%) Ϫ1.8 Ϫ1.7 1.4 Ϫ0.3 Ϫ2.0 Ϫ3.8 Ϫ3.8 Jamaica GDP at market pricesb 1.9 1.1 1.8 2.5 1.1 3.0 3.1 Current account balance/GDP (%) Ϫ2.7 Ϫ5.7 Ϫ11.1 Ϫ10.7 Ϫ11.5 Ϫ13.7 Ϫ13.6 Mexico GDP at market pricesb 3.5 4.1 2.8 4.8 2.9 3.2 3.6 Current account balance/GDP (%) Ϫ3.7 Ϫ1.0 Ϫ0.6 Ϫ0.2 Ϫ1.0 Ϫ0.9 Ϫ1.0 180 R E G I O N A L E C O N O M I C P R O S P E C T S Table A6 (continued ) (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 Nicaragua GDP at market pricesb 3.4 5.1 4.4 3.7 4.2 4.7 4.5 Current account balance/GDP (%) Ϫ28.7 Ϫ14.6 Ϫ13.0 Ϫ13.9 Ϫ11.4 Ϫ12.1 Ϫ10.2 Panama GDP at market pricesb 5.1 7.6 6.4 7.5 8.3 7.2 7.1 Current account balance/GDP (%) Ϫ4.8 Ϫ7.5 Ϫ5.1 Ϫ0.2 Ϫ5.6 Ϫ6.8 Ϫ7.5 Peru GDP at market pricesb 4.0 5.2 6.7 7.6 7.5 6.4 6.1 Current account balance/GDP (%) Ϫ5.5 0.0 1.5 2.9 1.8 0.8 0.4 Paraguay GDP at market pricesb 1.8 4.1 2.7 4.0 4.0 3.9 3.8 Current account balance/GDP (%) Ϫ2.2 2.0 0.0 Ϫ2.6 Ϫ2.6 Ϫ3.8 Ϫ3.8 St. Lucia GDP at market pricesb 3.1 3.9 5.8 5.4 5.2 5.1 5.0 Current account balance/GDP (%) Ϫ11.4 Ϫ16.6 Ϫ22.5 Ϫ18.9 Ϫ16.8 Ϫ16.9 Ϫ15.0 St. Vincent and the Grenadines GDP at market pricesb 2.1 5.4 2.2 4.5 5.5 6.3 5.9 Current account balance/GDP (%) Ϫ19.8 Ϫ29.0 Ϫ29.1 Ϫ24.2 Ϫ19.8 Ϫ17.7 Ϫ13.9 Uruguay GDP at market pricesb 3.0 11.8 6.8 7.0 5.5 4.2 3.8 Current account balance/GDP (%) Ϫ1.5 0.0 0.0 Ϫ2.7 Ϫ2.7 Ϫ3.3 Ϫ2.9 Venezuela, R.B. de GDP at market pricesb 2.1 17.9 10.3 10.3 8.3 5.8 4.2 Current account balance/GDP (%) 2.6 14.1 18.5 14.4 7.4 6.9 4.7 Source: World Bank. Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other World Bank documents. Barbados, Cuba, Grenada, and Suriname are not forecast because of data limitations. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. of economic activity in Argentina and the Dominican Republic–Central American Free- República Bolivariana de Venezuela could Trade Agreement. speed up the regional slowdown for energy Growth in Brazil is expected to moderate exporters, but a pickup in growth in Mexico from 4.8 percent in 2007 to 4.5 percent in would offset that to some extent. both 2008 and 2009. The positive fundamen- Despite the gradual reduction in oil prices, tals observed in 2006 and 2007—low interest growth among small energy importers is rates, a strong currency, and falling unem- likely to moderate from 6 percent in 2007 to ployment—should continue to underpin a ro- 5.1 percent by 2009. This outturn reflects the bust pace of domestic activity. At the same combined effects of weaker import demand in time, a further near-term acceleration in the United States, reduced remittance inflows growth is unlikely. The Central Bank has (linked to a slowdown of construction activ- taken a pause in interest rate reductions, ity in the United States), and increasing com- while quarter-on-quarter GDP figures show a petition from China following the phaseout slight moderation from the first quarter to the of textile and apparel quotas under the Multi- second quarter of 2007. Fiber Agreement. At the same time, GDP Argentina’s growth is expected to decel- should find support through continued strong erate sharply from 7.8 percent in 2007 to FDI inflows following implementation of the 5.7 percent in 2008 and to 4.7 percent in 181 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 2009. Despite rising fiscal revenues, persistent fundamentals have been supported by an ex- and accelerating inflation and increased public ceptionally favorable external environment. intervention in private sector activity appear Should that environment deteriorate substan- likely to discourage growth prospects. Recent tially, growth is likely to slow. Moreover, despite production and goods trade numbers under- improved fundamentals, some countries may be score a weakening in the pace of activity, vulnerable to a sharp reversal in conditions. caused in large part by the imposition of Overall, the region’s resilience to shocks energy rationing. Industrial output gained has improved, and better economic policies 2.3 percent in July (year-on-year), the weakest have supported this improvement. In particu- showing in more than five years, while steel lar, the structure of external debt—in terms of production contracted by 26 percent. maturity and foreign currency exposure—has Growth in Mexico is likely to rebound improved; the accumulation of reserves has, in from 2.9 percent in 2007 to 3.2 percent in most cases, surpassed external borrowing re- 2008 and to 3.6 percent in 2009. Although re- quirements; the region’s fiscal and current ac- mittances will contribute less to domestic ac- counts have been in surplus during the current tivity as growth in the United States slows, in- growth cycle; and independent central banks creased domestic credit to consumers and are imposing countercyclical monetary poli- businesses should support spending. Recent cies, especially in those countries where infla- fiscal reforms also point toward better growth tion targeting is the adopted policy regime. prospects, as improved revenue collection Notwithstanding these advances, some risks should allow the government to boost needed linked to a worsening of the external environ- infrastructure outlays. With a rebound of U.S. ment may remain a concern for the region. activity in the second half of 2008 and 2009, In a potentially difficult phase of rising risk Mexican exports will make a stronger contri- aversion in global financial markets, the region bution to growth. has, up to now, demonstrated that it has de- Finally, activity in the República Bo- veloped a stronger “immune system.” As livariana de Venezuela is anticipated to slow shown in figure A11, the responsiveness of the fairly rapidly, with GDP growth declining spreads on sovereign bonds (noninvestment from 8.3 percent in 2007 to 5.8 percent in grade) for Latin American and the Caribbean 2008 and 4.2 percent in 2009. Activity in late countries with respect to changes in risk aver- 2006 and early 2007 was supported by large- sion, though still elevated, is much lower when scale run-ups in fiscal outlays associated with contrasting the July 2006 to end-2007 period the presidential elections, but falling oil rev- with the August 1997 to August 1999 period enues over the forecast period make continued (the period of the financial crises in East Asia expansion in government spending unlikely. and Russia). Contagion effects to Latin America Private activity is also expected to slow sub- and the Caribbean through the financial chan- stantially. Higher inflation will likely result in nel seem less likely than during past challenging declines in real wages, a sharp falloff in FDI phases. However, there are still some country- will reduce the contribution of investment to specific issues: Argentina (because of the growth, and an uncertain regulatory environ- INDEC incident—the national statistics ment (notably with regard to property and agency producing questionable infection data) contract rights) is anticipated to hamper pri- and Ecuador (because of the outright discus- vate sector startups and job creation. sion of default) have undermined the percep- tion of their willingness to pay, regardless of Risks their reserves cushion, and therefore were hit A stabilization of growth in Latin America harder and earlier than the other countries. and the Caribbean at high rates in a historical The República Bolivariana de Venezuela was context and broad improvements in the region’s also affected because of political concerns. 182 R E G I O N A L E C O N O M I C P R O S P E C T S Figure A11 Financial test: Credit Figure A12 Exchange rate policy Lower elasticity of LAC EMBI with respect to risk dilemmas? aversion (HY bonds)… Real effective exchange rate indexes (January 2000 ϭ 100) EMBI Latin index EMBI Latin index 210 (noninvestment grade) (noninvestment grade) 190 5.3 6.3 Mexico in 170 y ϭ 0.9717x Ϫ 0.6581 150 5.2 6.2 August 1997–August 1999 130 (left axis) 5.1 6.1 110 July 2006-current 90 (right axis) 5.0 6.0 70 Peru y ϭ 0.6955x ϩ 1.5904 50 Argentina Brazil Colombia 4.9 5.9 30 1993 1995 1997 1999 2001 2003 2005 2007 4.8 5.8 Source: International Monetary Fund. 5.8 5.9 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 High yield index Source: Bloomberg weekly data; Credit Suisse high-yield index; JP Morgan EMBI. Note: EMBI ϭ Emerging markets bond index. Figure A13 Export product (value) concentration is increasing Export products concentration, Herfindahl index The region could still suffer adverse conse- 0.35 quences from a worsening and spreading of 0.30 the U.S. subprime crisis through real channels. 0.25 Lower remittances may hurt some of the poorest among Latin America and the 0.20 2005 Caribbean’s recipient countries, while lower 0.15 1996 external demand may be exacerbated by 0.10 weaker competitiveness resulting from appre- 0.05 ciating currencies, as shown in figure A12. Finally, terms-of-trade deterioration may 0 C hile o a C lia Ec bia a ru also exert negative pressure on aggregate M or Au ay be d il C ic d ic in ad az ib an e er n Pe ra d gu ex nt om th Am ela an C ua an Br st ge ar a ru ol Z output. Figures A13 and A14 summarize the U Ar tin w La Ne region’s vulnerability to commodity price shocks. In recent years, export concentration Sources: World Integrated Trade System. for the region, as captured by the Herfindahl index of exported goods, did not decline. In- deed, it increased in many countries, possibly because of an increase in specific commodity countries such as Mexico, but the overall trend prices (as the index is measured in nominal is toward diversification. terms). Increases in this index signal a potential The emergence of China and India played worsening of the risk associated with volatility a role in explaining the trade patterns dis- of global commodity prices. Counterbalancing played in figures A13 and A14, and on a this tendency is the geographic diversification positive note, may have permanently and fa- of Latin American and the Caribbean’s export vorably changed the terms of trade faced by markets. The concentration of Latin exports to the region. In this rosier situation, the region the U.S. market is quite strong, especially for may be drawn into intensive activities in areas 183 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 and figure A15).1 Continued growth in hy- Figure A14 Export market (value) drocarbon receipts among the region’s devel- concentration is falling oping (and high-income) oil exporters was a Export market concentration, Herfindahl index key factor supporting growth, as world oil 0.7 prices breached records at close to $100 a 0.6 2005 barrel toward the end of the year. Notwith- 1996 standing the severe drought that afflicted 0.5 countries in the Maghreb, notably Morocco, 0.4 a revival in European demand helped under- 0.3 pin exports for the resource-poor, labor- 0.2 abundant countries in the region, especially 0.1 the Arab Republic of Egypt, where a depreci- ation of the pound against the euro also as- 0 sisted, and Jordan.2 Moreover, record inflows le o a C lia Ec ia Ze a ru u M r Au ay be d il C ic d do ic in La ew ad r az ib an hi b th Am lan Pe ra of FDI, ample liquidity, and strong domestic gu ex nt om an C ua an Br st ar a ge ol U Ar e er C demand all bolstered growth across the di- N tin verse countries of the region. Sources: World Integrated Trade System. Oil exporters registered growth of 4.5 per- cent for the year, up from 4.0 percent in 2006, as GDP in Algeria and the Islamic Republic of Iran moved higher. The group of diversified of comparative advantage, such as natural exporters witnessed an easing of growth from resources and skills and technology, but addi- 6.2 percent in 2006 to 5.4 percent, largely as tional progress on some structural factors is output gains in Morocco plummeted from needed to take full advantage of these oppor- 8 percent to 2 percent. However, GDP in all tunities. In particular, the region has to im- other countries picked up or repeated its prove its investment climate and the skill com- strong performance of 2006. position of its labor force. Oil-related revenues for the year increased Compared with other regions, Latin 9 percent for developing exporters in the American and Caribbean fundamentals may appear to be unimpressive, and the region does not seem to be catching up in a significant way. Figure A15 Growth in Middle East and North Africa picks up Even for the most recent period, aggregate GDP growth, gross fixed capital formation (as Real GDP (percent change) Forecast 8 a share of GDP), and TFP growth remain well below averages for other developing regions. 7 Middle East and North Africa The Latin America and the Caribbean region 6 does not appear, at least not yet, to have been 5 capitalizing on the favorable external environ- 4 ment to raise its growth path. 3 2 Middle East and North Africa 1 Recent developments 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 GDP for the developing countries of the Mid- dle East and North Africa region grew nearly Oil exporters Diversified exporters 5 percent in 2007, matching the decade-high Source: World Bank. pace achieved the preceding year (table A7 184 R E G I O N A L E C O N O M I C P R O S P E C T S Table A7 Middle East and North Africa forecast summary (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 GDP at market pricesb 3.8 4.8 4.3 5.0 4.9 5.4 5.3 GDP per capitac 1.6 3.0 2.5 3.1 3.1 3.6 3.5 Purchasing power parity GDPd 4.7 4.8 4.3 5.0 4.9 5.4 5.1 Private consumption 3.8 6.3 5.0 5.2 4.9 4.9 5.2 Public consumption 4.3 2.7 5.9 5.6 7.0 7.4 4.7 Fixed investment 3.3 8.1 8.2 11.6 13.9 11.7 11.1 Exports, GNFSe 4.4 8.6 9.1 9.5 4.3 3.8 5.2 Imports, GNFSe 1.6 15.2 12.5 13.5 10.2 7.2 8.0 Net exports, contribution to growth 0.7 Ϫ1.9 Ϫ1.2 Ϫ1.6 Ϫ2.3 Ϫ1.5 Ϫ1.5 Current account balance/GDP (%) Ϫ0.5 7.4 9.6 9.6 8.2 9.5 6.2 GDP deflator (median, LCU) 7.4 9.1 11.7 8.7 4.4 6.1 4.3 Fiscal balance/GDP (%) Ϫ2.8 Ϫ2.7 3.4 2.2 Ϫ0.9 Ϫ1.8 Ϫ1.8 Memo items: GDP MENA Geographic regionf 3.4 5.0 5.2 4.8 4.6 5.1 4.9 Resource poor-labor abundantg 4.2 4.8 3.8 6.2 5.4 6.3 6.1 Resource rich-labor abundanth 3.3 4.9 4.6 3.8 4.4 4.6 4.4 Resource rich-labor importingi 3.0 5.2 6.8 4.7 4.2 4.6 4.5 Egypt, Arab Rep. of 4.6 4.1 4.5 6.8 7.1 7.0 6.8 Iran, Islamic Rep. of 3.7 5.1 4.3 4.6 5.0 5.0 4.7 Algeria 1.7 5.2 5.1 1.8 3.4 4.0 3.8 Source: World Bank. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. c. Measured in U.S. dollars. d. GDP measured at purchasing power parity exchange rates. e. Exports and imports of goods and nonfactor services. f. Geographic region includes high-income countries: Bahrain, Kuwait and Saudi Arabia. g Egypt, Jordan, Lebanon, Morocco and Tunisia. h. Algeria, Iran, Syria and Yemen. i. Bahrain, Kuwait, Oman and Saudi Arabia. region, rising to $160 billion. Among high- volume constraints on oil production and income oil exporters, oil-related revenues rose shipment, caused the current account surplus 13 percent to $382 billion, sufficient to fund to narrow from $34.5 billion in 2006 to $31 ongoing infrastructure and social programs billion in 2007, or from 13.3 to 11.1 percent while also adding to massive reserve levels.3 of GDP. Among developing country oil exporters, The dollar’s swift decline—tied in part to which are dominated in size by Algeria and reductions in U.S. interest rates to shore up the Islamic Republic of Iran, but also include the country’s interbank market—has had dif- Oman, Syria, and the Republic of Yemen, the fering effects in the region. Oil exporters find upturn in oil prices had varying effects (figure their dollar-based receipts falling sharply in A16). For example, in Algeria, hydrocarbon relation to the euro, the currency in which a receipts increased moderately to $54 billion, major proportion of imports are denomi- widening Algeria’s current account surplus nated, and are consequently suffering a form slightly to $29 billion, or 23 percent of GDP. of terms-of-trade loss. In contrast, diversified In the Islamic Republic of Iran, hydrocarbon exporters may find their competitiveness revenues grew 12 percent to $65 billion, but enhanced in the EU market, with local cur- rapid growth in consumer and government rencies depreciating moderately against the spending (as well as imports), together with euro. 185 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Egypt’s Issuer Default Rating to a positive out- Figure A16 Hydrocarbon exports continue look, with growth supported by double-digit to rise on higher prices, modest volume gains gains in investment. Morocco was awarded investment grade status for its sovereign Oil and gas exports ($ billions) bonds and quickly raised $675 million at a 175 low 55 basis-point spread. GDP growth for 150 the group—excluding Morocco, where the 125 effects of drought bias figures for 2007— 100 increased from 5.8 percent in 2006 to 6.2 per- cent in 2007 on the strength of 7.1 percent 75 growth in Egypt, 6.0 percent in Jordan and 50 Tunisia, and recovery for Lebanon from the 25 downturn of 2006. Growth in Egypt is broadly based, with 0 2000 2001 2002 2003 2004 2005 2006 2007 non-oil manufacturing and retail trade ac- counting for half of overall output gains. The Iran, Islamic Republic of Algeria Oman fastest-growing sectors include construction, Yemen, Republic of Syrian Arab Republic Suez Canal traffic, communications, and Source: United Nations Comtrade Database; World Bank. tourism. Exports have boomed by 23 percent over 2007 to date, especially non-oil goods, but at 29 percent growth, import demand is even stronger and has kept the contribution of A fall in hydrocarbon output has con- trade to growth negative while widening the strained growth in Algeria, with GDP country’s deficit on trade. But for Egypt and advancing just 1.8 percent in 2006 and 3.4 many of the diversified exporters, services re- percent in 2007. Oil and gas output growth ceipts and burgeoning remittances outweigh declined 2.6 percent in 2006, but activity un- shortfalls on trade, allowing countries to related to hydrocarbons expanded by a robust maintain current account surplus positions 6 percent in 2007. A major government in- (figure A17). vestment initiative got under way and is slated In Egypt, Morocco, and Tunisia, reforms to expend more than $22 billion over the com- are improving the business climate and in- ing years on housing, transport, and agricul- creasing the competitiveness of the export sec- ture. This is boosting job growth in construc- tor. Egypt, Jordan, Morocco, and Tunisia tion and related sectors and underpinning signed a free trade agreement (the Agadir strong household spending. Agreement) to help promote intraregional In the Islamic Republic of Iran, despite trade while addressing rules-of-origin major fiscal expansion in 2007—seen in the questions that often are part of broader widening of the budget deficit from 0.2 per- frameworks, such as the European Union– cent of GDP in 2006 to 2.4 percent—growth Mediterranean agreements. FDI is becoming is likely to step up just 0.4 percentage points, an important driver for private investment to 5 percent given the extent of leakage into and growth in this group of countries, and as imports that occurred over the year. Exports reforms proceed, the potential for attracting advanced a modest 1.3 percent against a additional FDI grows in step. 13.5 percent gain in imports. Indeed, large-scale FDI has been flowing For the diversified exporters, or resource- into the region for the last three years on the poor, labor-abundant economies, 2007 back of emerging and increasingly sustained marked a watershed for several countries in economic growth, diversification, and ongo- the area of finance. The Fitch Agency raised ing reforms. Flows to the geographic region 186 R E G I O N A L E C O N O M I C P R O S P E C T S Republic of Iran (18 percent year-on-year at Figure A17 Tourism and remittances latest readings) and Egypt (10.9 percent), offset widening trade deficits for Maghreb and Mashreq countries where consumer price inflation has trended higher because of domestic supply shocks, for Balance of nonfactor services and net transfers ($ billions) example, the partial elimination of subsidies 30 in September 2006. More recent acceleration 25 in Algeria and other oil exporters has accom- panied rapid growth in domestic demand. 20 Moreover, the ratcheting up of food and en- 15 ergy costs—the former notably in grains, with a 40 percent jump over 2007 related, in, part 10 to increased global production dedicated to 5 biofuels—presents difficulties for a number of economies, causing price pressures through 0 2000 2001 2002 2003 2004 2005 2006 imports as well as strains on fiscal positions from widespread subsidies covering fuels and Net transfers Balance of services cereals. Source: International Monetary Fund balance of payments statistics. Medium-term outlook Prospects for developing countries in the re- gion appear relatively bright, with aggregate (including the high-income oil exporters) in- GDP gains projected to top 5 percent in 2008 creased 38 percent, to $64 billion in 2006, and 2009. Despite uncertainties looming in after doubling to $46 billion in 2005. Among the external environment for 2008 related to the diversified exporters, the share of FDI in the financial and real implications of the U.S. GDP doubled from 3.0 percent, on average, subprime mortgage crisis, growth among over 2000–04 to 5.6 percent in 2006. FDI developing oil exporters is anticipated to pick flows are tending to focus on the services sec- up, in large part tied to domestic develop- tor, including finance, telecommunications, ments, although oil prices will likely remain at and real estate, as well as hydrocarbons and high levels ($84 per barrel), thereby helping to related industries. Direct investment flows to sustain revenues supporting large, project- Egypt, in particular, are booming, reaching related expenditures. GDP gains for the oil ex- $11 billion during the country’s fiscal 2007, porters are projected to reach 4.7 percent in up from $6 billion the previous year. High- 2008 before receding to 4.6 percent in 2009 as income countries in the region have emerged global oil prices begin to recede. as major investors in the Middle East and For the diversified exporters, growth North Africa. The United Arab Emirates, for should pick up sharply in 2008, to 6.3 percent example, invested $8 billion in Egypt in trans- from 5.4 percent in 2007. A rebound in Mo- port and tourism infrastructure during 2006. rocco to 5.5 percent growth from the depths of Evidence suggests that FDI continues to flow drought is a factor in this outlook. Investment- into the region’s developing and high-income led growth appears to be increasingly well countries, setting a strong foundation for fu- established in Egypt, where activity is expected ture growth and eventual alleviation of the re- to remain within a higher 7 percent range over gion’s unemployment problem. the forecast period. Sustained growth of Median inflation in the region currently around 6 percent in Jordan and Tunisia is stands at 5.0 percent, up from 3.2 percent in likely, grounded in services exports and in- 2006. Inflation has become an important issue creasingly in investment and construction for several countries, including the Islamic funded by FDI. In Lebanon, stronger growth 187 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 on a sustained basis is unlikely until the politi- markets slumped only briefly during the bout cal environment has improved (table A8). of global volatility, and indeed, stock ex- changes in the Gulf states have outperformed Risks the Morgan-Stanley emerging market aver- The region appears to have suffered little in age through the final months of 2007 (fig- the way of direct effects from the financial ure A18). turbulence of mid-2007. Yet the increasing so- Markets for non-oil commodities, manu- phistication of reserves management among factures, and tourism services may suffer a high-income oil exporters and the movement more pronounced slowdown linked to the rip- toward establishing large-scale sovereign ple effects of financial difficulties already pre- wealth funds may increase the exposure of sent in the United States and the Euro Area. such portfolios to innovative, yet complex Should a significant credit crunch occur, slow- and hard to price, securities. Regional equity ing growth across the OECD as well as across Table A8 Middle East and North Africa country forecasts (annual percent change unless indicated otherwise) Estimate Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 Algeria GDP at market pricesb 1.7 5.2 5.1 1.8 3.4 4.0 3.8 Current account balance/GDP (%) 3.2 13.1 20.7 24.2 23.0 24.4 21.2 Egypt, Arab Rep. of GDP at market pricesb 4.6 4.1 4.5 6.8 7.1 7.0 6.8 Current account balance/GDP (%) 0.0 4.3 3.3 1.6 2.1 2.4 1.9 Iran, Islamic Rep. of GDP at market pricesb 3.7 5.1 4.3 4.6 5.0 5.0 4.7 Current account balance/GDP (%) 1.2 15.9 16.2 13.3 11.1 12.7 6.8 Jordan GDP at market pricesb 5.1 8.4 7.3 6.3 6.0 5.8 6.0 Current account balance/GDP (%) Ϫ4.3 Ϫ0.2 Ϫ18.7 Ϫ15.0 Ϫ13.5 Ϫ14.6 Ϫ12.6 Lebanon GDP at market pricesb 7.2 6.3 1.0 0.0 1.0 3.5 4.5 Current account balance/GDP (%) — Ϫ22.5 Ϫ23.2 Ϫ16.7 Ϫ19.6 Ϫ19.0 Ϫ15.9 Morocco GDP at market pricesb 2.2 5.2 2.4 8.0 2.0 5.5 4.5 Current account balance/GDP (%) Ϫ1.4 1.7 1.9 2.8 2.3 0.6 0.5 Oman GDP at market pricesb 4.6 3.1 5.8 6.0 6.0 6.3 5.8 Current account balance/GDP (%) Ϫ3.7 2.3 13.7 12.4 12.2 17.2 11.3 Syrian Arab Republic GDP at market pricesb 5.1 3.9 4.5 5.1 3.9 3.7 4.8 Current account balance/GDP (%) 1.0 2.4 1.1 2.8 2.5 3.2 0.8 Tunisia GDP at market pricesb 4.7 6.0 4.0 5.4 6.0 6.2 6.0 Current account balance/GDP (%) Ϫ4.3 Ϫ2.0 Ϫ1.1 Ϫ2.1 Ϫ2.5 Ϫ2.6 Ϫ2.1 Yemen, Rep. of GDP at market pricesb 5.5 2.5 4.6 4.0 3.8 4.3 4.0 Current account balance/GDP (%) Ϫ4.3 1.7 2.3 0.4 Ϫ2.2 Ϫ2.3 Ϫ5.1 Source: World Bank. Notes: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other World Bank documents. Djibouti, Gaza, Iraq, Libya, and West Bank are not forecast because of data limitations. — = not available. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. 188 R E G I O N A L E C O N O M I C P R O S P E C T S Saudi Arabia. For reference, the GDP of the developing Figure A18 Middle East and North Africa countries of the Middle East and North Africa region equities rebound from the mid-2007 slump accounts for just 62 percent of the geographic region. Index, Jan. 1, 2007 ϭ 100 3. Changes in the volume of oil and gas production 150 have been modest in recent years, ranging from 0.5 to Morgan-Stanley 1.0 percent annual gains in Algeria to a decline in the 138 Middle East Composite Islamic Republic of Iran and the Republic of Yemen. and North Africa Index total Hence the buildup in export revenues is largely due to 125 Egypt, Arab Rep. of the large-scale increase in global oil prices over 2005 through 2007. 113 100 GCC 88 South Asia Recent developments 07 7 07 7 7 7 7 7 00 00 00 00 00 00 20 20 ,2 ,2 ,2 ,2 ,2 ,2 South Asia’s regional GDP was vibrant at 8.4 2, 1, 15 14 27 10 23 .6 .3 n. ov b. ay n. g. p. ar Ja Fe N Ju Au Se M M percent growth in 2007, easing only moder- Source: Morgan-Stanley. ately from the 8.8 percent outturn of 2006. The region continues to build on the momen- tum of recent fiscal and business-oriented re- forms. Private consumption and investment accelerated in 2007 despite more restrictive developing countries, demand for crude oil monetary policies. Large capital inflows, ris- and refined petroleum products could decline ing incomes, and strong worker remittances and lead to a sharp fall in prices with the at- have supported private spending. Improve- tendant effects ensuing for revenues and ment in business sentiment—both foreign (to- growth. ward India) and domestic—and rising corpo- rate profits have provided a strong foundation for investment. Growth in government spend- Notes ing has come down from 12.5 percent in 2006 1. For the purposes of this report, coverage of the and is now in line with overall economic region is restricted (for the sake of consistency across activity. The decline in government spending all regions) to include only low- and-middle-income countries. These countries include Algeria, the Arab is primarily attributable to a sharp falloff in Republic of Egypt, the Islamic Republic of Iran, Jor- Pakistan’s outlays following a spike in 2006 dan, Lebanon, Morocco, Oman, the Syrian Arab Re- linked to recovery and reconstruction efforts public, Tunisia, and the Republic of Yemen. Because of after the December 2005 earthquake. data limitations, the middle-income economies of Dji- Among the larger economies, a modest eas- bouti, Iraq, Libya, and the West Bank and Gaza are not ing of GDP growth in India, from 9.4 percent included in the aggregates. High-income countries in in 2006 to 9.0 percent in 2007 reflects a firm- the region are Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates, to which references are ing in Indian import demand that yielded a made. Qatar and the United Arab Emirates are not in- negative net export position, further under- cluded in the high-income aggregate because of data pinned by strong appreciation of the rupee limitations. (figure A19). The falloff in growth in Pakistan 2. For the developing countries in the region, the re- from 6.9 percent in 2006 to 6.4 percent in source-poor, labor-abundant countries are Egypt, Jor- 2007 stems from a decline in private sector dan, Lebanon, Morocco, and Tunisia. The resource- credit growth, a slowdown in FDI inflows be- rich, labor-abundant countries are Algeria, the Islamic Republic of Iran, Syria, and the Republic of Yemen. ginning in July 2007, and weaker exports. In Oman is the developing, resource-rich, labor-importing Bangladesh, tighter domestic credit conditions country. However, memo items in table A7 cover the induced a softening in investment growth, full geographic region, including Bahrain, Kuwait, and while net exports turned negative, explaining 189 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Pakistan and about 2 percent in India. Figure A19 South Asian economies ease Pakistan’s current account is of some concern, into 2007 having deteriorated by the equivalent of more than 5 percentage points of GDP in the last India four years. Strong flows of worker remittances into the region have helped contain the extent South Asia of deterioration in current account positions. Remittances amount to substantial propor- Pakistan tions of GDP in many South Asian countries, Sri Lanka helping to smooth private consumption while offering a buffer for external trade shortfalls. Bangladesh 2005 2006 Remittance receipts are the equivalent of a 2007 large 16 percent of GDP in Nepal, 9 percent in Nepal Sri Lanka, 7 percent in Bangladesh, and 4 per- cent in Pakistan. Strong foreign capital flows 0 2.5 5.0 7.5 10.0 to India and Pakistan, in particular, have com- GDP growth (percent) plemented remittances to provide generally Sources: World Bank and national agencies. comfortable levels of external finance. Inflation pressures in India and Pakistan eased over the first three quarters of 2007 (fig- the slight moderation in growth from 6.6 in ure A20). In India, the appreciating rupee con- 2006 to 6.5 percent in 2007. In Sri Lanka, an tributed to an easing of wholesale price infla- escalation of the conflict between govern- tion to 3 percent as of early November ment-led forces and separatists dampened (year-on-year), breaching a five-year low. prospects in the tourism industry and con- However, risks of a regional revival in tributed to a 1.1 percentage point falloff in inflation remain, stoked by an incomplete growth to 6.3 percent in 2007. In contrast, growth in Nepal is on course to pick up mod- Figure A20 Monetary policy is tightened estly from 2.3 percent in 2006 to 2.5 percent in response to a buildup in inflation in 2007 as the peace process moves forward, bringing increases in foreign assistance and a Consumer price inflation (percent change year-on-year) and policy interest rates (percent) gradual recovery in the tourism sector. 10 Pakistan policy rate At the regional level, robust investment de- 9 mand drove rapid import growth—which av- India policy rate eraged 11 percent a year and exceeded export 8 growth by 2.5 percentage points—while cur- 7 rency appreciation also increased demand for 6 imports. Exports remained healthy at 8.5 per- cent, but were slowed by softening demand 5 in high-income countries and real apprecia- 4 tions that have made export markets more 3 competitive. 06 6 06 6 07 7 07 7 00 00 00 00 20 20 20 20 The regional current account deficit in- 2 .2 2 .2 n. r. l. n. r. l. ct ct Ju Ap Ju Ap Ja Ja O O creased as a share of GDP, moving from 1.3 percent in 2006 to 2.4 percent. Current ac- India Consumer Price Inflation Pakistan Consumer Price Inflation count positions worsened in a number of countries over the course of 2007, with Source: World Bank. deficits reaching close to 5 percent of GDP in 190 R E G I O N A L E C O N O M I C P R O S P E C T S pass-through of higher energy costs to the October, compared with daily net purchases final consumer in several countries, increasing of $232 million in September. In relation to and widespread upward pressure on food local currencies, equity markets were up 36 prices, strong credit growth, and sharp gains percent in India (50 percent in dollar terms) in equity markets that have fueled liquidity. and 20 percent in Pakistan (19 percent in In Sri Lanka, inflation reignited in 2007, with dollar terms) from January 1 to October 31, 12-month moving average inflation increasing 2007. to 18 percent in September, up from 6.8 a year earlier. Inflation has also picked up in Mal- Medium-term outlook dives, from 3.7 percent in 2006 to 7.0 percent Tighter credit conditions, volatility in interna- in 2007, reflecting expansionary government tional financial markets, a risk of recession in spending and a budget deficit anticipated to the United States, and slowing growth in the reach 24 percent of GDP in 2007, caused in European Union should yield a fairly pro- part by continuing post-tsunami reconstruc- nounced slowing of external demand for tion and large tourism construction projects. South Asia’s exports during 2008. This is Inflation also appears to be stepping up in likely to worsen the region’s overall current Bangladesh in the wake of the recent cyclone. account deficit, as will increases in global oil In India, monetary tightening and large prices into 2008. Nonetheless, contributions capital inflows led to significant currency to growth from domestic demand—both pri- appreciation during 2007, with the rupee vate consumption and investment—are ex- reaching a near decadal high of Rs 39.2 pected to remain relatively high, despite facing against the dollar by the end of November. headwinds from tighter monetary conditions This development has contributed to an easing and further consolidation in fiscal positions. of inflationary pressures through prices of These factors are expected to lead to an imports, while at the same time it has reduced easing of regional GDP growth from 8.4 per- the price competitiveness of India’s exporters. cent in 2007 to 7.9 percent in 2008, with most The strong currency gains prompted the countries experiencing a modest deceleration Reserve Bank of India to sell rupees to help (tables A9 and A10). In Bangladesh, however, contain the rate of appreciation and to intro- heightened political tensions and severe flood- duce selected capital control measures. Pak- ing were curbing demand in the second half of istan’s currency had been appreciating slightly 2007 and will contribute to a full percentage against the dollar over much of the year, but it point reduction in growth to 5.5 percent for began to depreciate in response to heightened 2008. Regional growth is expected to pick up uncertainty on international capital markets to 8.1 percent by 2009, as recovering growth and the president’s imposition of a state of in the OECD firms up external demand and as emergency in early November. receding oil prices ease pressures on the im- The increased volatility of international port bill. Domestic absorption is projected to credit markets during mid-2007 tied to the regain momentum in 2009, assuming that housing market downturn in the United States price conditions permit an easing of monetary initially led to a falloff in equity prices in India policy during the second half of 2008. and Pakistan, but markets in both countries Tighter credit conditions in international have since recouped their losses. In October, markets and a decreased appetite for risk India’s Sensex index rose above 19,000 for the among investors could result in a falloff in re- first time, driven by overseas fund purchases. gional capital inflows, which have contributed According to the Securities and Exchange to recent strong growth outturns, particularly Board of India, foreign investors bought an in India and Pakistan. Although trade open- average of nearly $500 million more than they ness has generally increased (except in sold in Indian equities during the first half of Afghanistan, Nepal, and Sri Lanka, which are 191 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table A9 South Asia forecast summary (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 GDP at market pricesb 5.2 7.8 8.7 8.8 8.4 7.9 8.1 GDP per capitac 3.2 6.1 7.0 7.2 6.9 6.4 6.6 Purchasing power parity GDPd 6.4 7.9 8.7 8.9 8.5 8.0 8.2 Private consumption 4.0 5.7 7.1 5.6 6.4 6.3 6.6 Public consumption 3.9 5.3 8.8 12.5 8.4 8.3 8.7 Fixed investment 5.5 10.2 14.2 14.2 15.2 13.6 12.6 Exports, GNFSe 9.0 14.5 7.0 9.0 8.5 8.4 10.5 Imports, GNFSe 7.9 32.9 12.5 11.9 11.0 11.1 12.1 Net exports, contribution to growth Ϫ0.1 Ϫ3.1 Ϫ1.3 Ϫ0.9 Ϫ0.9 Ϫ1.0 Ϫ0.9 Current account balance/GDP (%) Ϫ1.5 Ϫ0.1 Ϫ1.2 Ϫ1.3 Ϫ2.4 Ϫ3.0 Ϫ2.7 GDP deflator (median, LCU) 8.0 4.9 5.7 7.5 7.0 7.0 6.4 Fiscal balance/GDP (%) Ϫ7.8 Ϫ6.4 Ϫ6.4 Ϫ6.3 Ϫ6.1 Ϫ5.5 Ϫ5.1 Memo items: GDP South Asia, excluding India 4.4 6.1 6.7 6.7 6.3 6.0 6.5 India 5.5 8.3 9.2 9.4 9.0 8.4 8.5 Pakistan 3.9 6.4 7.7 6.9 6.4 6.5 6.7 Bangladesh 4.8 6.3 6.0 6.6 6.5 5.5 6.5 Source: World Bank. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. c. Measured in U.S. dollars. d. GDP measured at purchasing power parity exchange rates. e. Exports and imports of goods and nonfactor services. Table A10 South Asia country forecasts (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 Bangladesh GDP at market pricesb 4.8 6.3 6.0 6.6 6.5 5.5 6.5 Current account balance/GDP (%) Ϫ0.4 Ϫ0.5 Ϫ0.3 1.8 1.3 0.9 0.2 India GDP at market pricesb 5.5 8.3 9.2 9.4 9.0 8.4 8.5 Current account balance/GDP (%) Ϫ1.1 0.1 Ϫ1.0 Ϫ1.1 Ϫ2.2 Ϫ2.8 Ϫ2.5 Nepal GDP at market pricesb 5.0 3.7 2.7 2.3 2.5 4.0 4.5 Current account balance/GDP (%) Ϫ6.4 Ϫ0.7 0.0 Ϫ0.1 Ϫ1.7 Ϫ2.4 Ϫ2.9 Pakistan GDP at market pricesb 3.9 6.4 7.7 6.9 6.4 6.5 6.7 Current account balance/GDP (%) Ϫ3.7 Ϫ0.8 Ϫ3.3 Ϫ4.3 Ϫ4.9 Ϫ5.8 Ϫ5.3 Sri Lanka GDP at market pricesb 5.2 5.4 6.0 7.4 6.3 6.2 6.5 Current account balance/GDP (%) Ϫ4.6 Ϫ3.4 Ϫ3.1 Ϫ4.9 Ϫ4.8 Ϫ5.1 Ϫ4.5 Source: World Bank. Note: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other World Bank documents. Afghanistan, Bhutan, and Maldives are not forecast because of data limitations. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. 192 R E G I O N A L E C O N O M I C P R O S P E C T S all suffering from civil strife), openness re- (17 percent), Pakistan (11 percent), and Sri mains relatively low in most countries. As a Lanka (12 percent). India’s food imports ac- consequence, the region is likely to be buffered count for just 3 percent of its total merchan- to a degree from a falloff in external demand dise imports. Aside from putting increased tied to the downturn in the credit cycle. pressure on external positions, higher interna- tional food prices carry potentially serious im- plications for the poorest members of these Risks societies and could strain government coffers Relatively large current account deficits in and generate increased inflationary pressures Maldives, Pakistan, and Sri Lanka remain of given widespread food subsidies. Similarly, concern, particularly in an environment of further increases in energy prices remain a risk increased volatility in international financial for the region, which is highly dependent on markets. In Maldives and Sri Lanka, fiscal oil imports. In India and Pakistan, for exam- deficits exceed 7.3 percent of GDP, and for- ple, fuel imports represent more than 30 per- eign reserve positions were fairly tight as of cent and 20 percent of merchandise imports, mid-2007, equivalent to 2.5 months of import respectively. cover. Although import cover in Pakistan is Internal political and military tensions con- still a relatively comfortable four months, it is tinue to represent downside risks to the projec- on a declining trend, suggesting that further tions, as demonstrated, for example, by in- adjustments are required. Accordingly, a sud- creased fighting in the civil war in Sri Lanka den and marked slowdown in capital inflows from mid-2006 through 2007. Correspond- or a discrete adjustment in global financial ingly, improving relations represent potential markets could have noticeable adverse eco- upside opportunities, such as the ongoing nomic effects on these countries. progress in reestablishing ties between India and European and U.S. restrictions on some Pakistan with the opening on October 1, 2007, categories of Chinese textile and clothing ex- of the first overland truck route across the bor- ports will be lifted at the end of 2008, and in- der after several decades of closed borders. creased competition in 2009 could hurt re- gional exporters. Potential effects may be discerned by examining developments in Sub-Saharan Africa Canada, which has not imposed safeguard re- Recent developments strictions on China: Bangladesh’s share of Economic growth in Sub-Saharan Africa ac- Canada’s textile and clothing market declined celerated from 5.7 percent in 2006 to 6.1 per- from 7.4 percent in 2005–06 to 6.9 percent cent in 2007, the region’s fastest pace of over 2007 to date. Among regional exporters, growth in more than three decades (figure Sri Lanka appears to be most at risk: nearly A21). Robust 8.1 percent GDP growth among one-third of its total merchandise exports to the region’s oil exporters and 5.3 percent gains the EU and nearly one-fifth of its shipments to for oil-importing countries, not including the United States are in categories in which South Africa, powered the growth. High oil Chinese trade will be liberalized (see box 1.1 prices and new oil production, notably in in chapter 1). Angola and Sudan, helped propel growth in High, and in some cases increasing, com- the oil-exporting countries to the highest rate modity prices also present a risk for the re- in almost 35 years. At the same time, the gion’s economies. Sharp gains in international boom in non-oil commodity prices, in conjunc- food prices are a growing threat in a region tion with increased openness and improved where food imports represent 11–20 percent macroeconomic stability, boosted growth in of total merchandise imports: Bangladesh oil-importing economies to a 10-year high (19 percent), Maldives (16 percent), Nepal (table A11). 193 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 robust expansion, with third-quarter growth Figure A21 Growth in Sub-Saharan Africa accelerating to 4.7 percent (seasonally ad- has accelerated markedly… justed annual rate) from 4.4 percent in the sec- Real GDP (percent change) ond quarter. There are indications, however, Forecast 8 that higher borrowing costs have dampened 7 the pace of consumption growth, while higher 6 5 interest rates and a stronger rand are under- 4 mining growth in the manufacturing sector. 3 Meanwhile gross fixed capital formation con- 2 tinues to expand at a robust pace, and will 1 likely do so in coming quarters as infrastruc- 0 ture spending is under way for the 2010 Ϫ1 World Soccer Cup. Softer private consump- Ϫ2 tion growth and a modest improvement in the 91 00 03 06 09 70 73 76 79 82 85 88 94 97 terms of trade reduced South Africa’s current 19 20 20 20 20 19 19 19 19 19 19 19 19 19 Source: World Bank. account deficit to 6.5 percent of GDP in the second quarter of 2007, from a 6.9 percent gap in the previous quarter. Despite softer pri- Output expansion in South Africa, the re- vate consumption, increased capital and con- gion’s largest economy, appears slated to ease struction materials imports and deterioration to 5.0 percent in 2007 from 5.4 percent in in the terms of trade will cause the current 2006. Quarterly output readings point to account balance to widen (table A12). Table A11 Sub-Saharan Africa forecast summary (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 GDP at market pricesb 2.3 5.3 5.8 5.7 6.1 6.4 5.8 GDP per capitac Ϫ0.4 2.9 3.4 3.7 4.0 4.4 3.8 Purchasing Power Parity GDPd 3.4 5.5 6.1 6.1 6.5 6.7 6.1 Private consumption 1.2 5.5 5.4 6.0 5.1 5.1 5.1 Public consumption 2.6 5.0 4.7 6.6 6.7 6.5 6.1 Fixed investment 3.7 9.1 13.7 15.7 13.2 12.5 11.8 Exports, GNFSe 4.7 6.7 11.6 4.4 5.7 7.3 6.6 Imports, GNFSe 4.4 9.3 14.6 12.3 8.2 8.6 8.9 Net exports, contribution to growth 0.2 Ϫ0.9 Ϫ1.1 Ϫ3.0 Ϫ1.2 Ϫ0.9 Ϫ1.4 Current account balance/GDP (%) Ϫ2.1 1.0 Ϫ0.3 Ϫ0.2 Ϫ1.0 Ϫ0.9 Ϫ2.1 GDP deflator (median, LCU) 10.1 7.5 6.0 6.5 5.8 4.8 4.5 Fiscal balance/GDP (%) Ϫ4.2 Ϫ0.7 0.6 1.6 Ϫ0.2 0.6 0.1 Memo items: GDP SSA excluding South Africa 2.6 5.5 6.2 5.9 6.7 7.2 6.2 Oil exporters 2.2 6.0 7.3 6.7 8.1 9.0 6.9 CFA countries 2.6 4.2 4.0 2.8 3.7 4.5 4.1 South Africa 1.8 4.8 5.0 5.4 5.0 5.1 5.3 Nigeria 2.8 6.0 6.6 5.6 5.9 7.4 6.1 Kenya 1.9 4.9 5.8 6.1 6.3 5.3 5.1 Source: World Bank. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. c. Measured in U.S. dollars. d. GDP measured at purchasing power parity exchange rates. e. Exports and imports of goods and nonfactor services. 194 R E G I O N A L E C O N O M I C P R O S P E C T S Table A12 Sub-Saharan Africa country forecasts (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 Angola GDP at market pricesb 0.8 11.2 20.6 16.9 24.3 21.7 13.4 Current account balance/GDP (%) Ϫ6.1 5.9 15.1 13.6 12.4 9.6 3.7 Benin GDP at market pricesb 4.8 3.1 2.9 3.6 4.4 5.1 5.3 Current account balance/GDP (%) Ϫ6.8 Ϫ7.8 Ϫ6.3 Ϫ5.4 Ϫ5.7 Ϫ7.0 Ϫ7.4 Botswana GDP at market pricesb 6.2 5.9 3.8 2.6 4.8 4.4 3.9 Current account balance/GDP (%) 8.1 2.9 16.6 18.0 17.6 14.7 12.8 Burkina Faso GDP at market pricesb 4.0 3.9 7.1 6.1 5.3 5.5 5.9 Current account balance/GDP (%) Ϫ5.6 Ϫ11.0 Ϫ10.5 Ϫ10.1 Ϫ10.2 Ϫ11.0 Ϫ11.3 Burundi GDP at market pricesb Ϫ1.7 4.8 0.9 5.4 4.2 5.3 5.1 Current account balance/GDP (%) Ϫ3.4 Ϫ25.0 Ϫ17.9 Ϫ17.0 Ϫ15.5 Ϫ14.9 Ϫ13.7 Cape Verde GDP at market pricesb 5.8 4.5 5.9 6.2 6.3 6.6 6.4 Current account balance/GDP (%) Ϫ8.3 Ϫ16.3 Ϫ5.5 Ϫ12.0 Ϫ14.6 Ϫ15.8 Ϫ13.7 Cameroon GDP at market pricesb 1.4 3.7 2.0 3.5 3.8 4.4 4.2 Current account balance/GDP (%) Ϫ3.0 Ϫ2.6 Ϫ4.2 Ϫ0.7 Ϫ0.6 Ϫ0.9 Ϫ2.4 Central African Republic GDP at market pricesb 1.6 1.3 2.2 3.3 3.5 3.8 4.1 Current account balance/GDP (%) Ϫ4.3 Ϫ4.6 Ϫ4.9 Ϫ2.9 Ϫ2.9 Ϫ3.9 Ϫ4.6 Chad GDP at market pricesb 2.3 29.5 7.9 1.4 Ϫ1.4 4.2 2.1 Current account balance/GDP (%) Ϫ5.5 Ϫ18.7 Ϫ6.6 Ϫ7.3 Ϫ4.8 Ϫ2.6 Ϫ1.8 Comoros GDP at market pricesb 1.1 Ϫ0.2 4.2 1.3 1.8 2.5 2.7 Current account balance/GDP (%) Ϫ6.8 Ϫ3.4 Ϫ4.9 Ϫ5.9 Ϫ5.1 Ϫ5.2 Ϫ5.5 Congo, Dem. Rep. of GDP at market pricesb Ϫ5.6 6.6 6.5 5.1 6.1 7.3 6.8 Current account balance/GDP (%) 2.0 Ϫ8.8 Ϫ10.0 Ϫ8.9 Ϫ9.3 Ϫ9.5 Ϫ9.9 Congo, Rep. of GDP at market pricesb 1.5 3.6 7.8 6.6 3.2 6.3 5.9 Current account balance/GDP (%) Ϫ16.5 15.5 16.2 11.0 6.1 11.0 8.0 Côte d’Ivoire GDP at market pricesb 2.3 1.8 1.8 0.9 1.7 2.8 3.1 Current account balance/GDP (%) Ϫ4.0 1.6 0.4 3.3 2.5 1.0 Ϫ0.5 Equatorial Guinea GDP at market pricesb 18.4 10.0 6.5 Ϫ5.2 8.8 9.0 Ϫ1.4 Current account balance/GDP (%) Ϫ40.6 7.3 6.8 6.3 4.3 7.7 2.8 Eritrea GDP at market pricesb — 1.9 4.8 1.7 1.9 2.0 2.2 Current account balance/GDP (%) — Ϫ13.6 Ϫ28.0 Ϫ31.6 Ϫ30.9 Ϫ30.1 Ϫ28.5 Ethiopia GDP at market pricesb 2.3 12.3 10.5 9.6 9.3 7.7 7.4 Current account balance/GDP (%) Ϫ0.8 Ϫ6.9 Ϫ7.7 Ϫ9.6 Ϫ7.3 Ϫ7.4 Ϫ5.6 Gabon GDP at market pricesb 2.4 1.4 3.0 1.2 4.8 3.9 3.7 Current account balance/GDP (%) 5.7 12.8 13.7 21.4 17.3 21.4 18.6 (continued) 195 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 Table A12 (continued ) (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 Gambia, The GDP at market pricesb 3.3 5.1 6.9 6.4 6.1 5.3 5.8 Current account balance/GDP (%) Ϫ1.6 Ϫ11.1 Ϫ21.6 Ϫ21.5 Ϫ20.4 Ϫ21.2 Ϫ18.3 Ghana GDP at market pricesb 4.3 5.6 5.9 6.2 4.9 5.4 6.1 Current account balance/GDP (%) Ϫ6.4 Ϫ3.6 Ϫ6.5 Ϫ8.7 Ϫ10.3 Ϫ10.2 Ϫ8.4 Guinea GDP at market pricesb 3.9 2.7 3.3 2.4 2.1 3.7 3.2 Current account balance/GDP (%) Ϫ5.7 Ϫ4.3 Ϫ5.2 Ϫ6.1 Ϫ7.3 Ϫ10.7 Ϫ11.5 Guinea-Bissau GDP at market pricesb 1.5 2.2 3.2 2.7 2.7 2.6 3.3 Current account balance/GDP (%) Ϫ24.0 Ϫ4.9 Ϫ7.5 Ϫ11.3 Ϫ10.1 Ϫ4.3 Ϫ3.3 Kenya GDP at market pricesb 1.9 4.9 5.8 6.1 6.3 5.3 5.1 Current account balance/GDP (%) Ϫ1.6 Ϫ2.2 Ϫ0.8 Ϫ2.1 Ϫ3.2 Ϫ4.1 Ϫ3.6 Lesotho GDP at market pricesb 3.4 3.1 2.9 6.9 4.1 4.8 4.4 Current account balance/GDP (%) Ϫ13.3 Ϫ5.6 Ϫ7.4 3.0 0.1 Ϫ0.9 2.4 Madagascar GDP at market pricesb 1.7 5.3 4.6 4.9 5.8 6.3 6.9 Current account balance/GDP (%) Ϫ7.8 Ϫ12.4 Ϫ11.9 Ϫ8.9 Ϫ14.7 Ϫ21.7 Ϫ21.4 Malawi GDP at market pricesb 3.4 7.1 2.7 7.4 6.3 6.1 5.6 Current account balance/GDP (%) Ϫ8.5 Ϫ4.7 Ϫ9.5 Ϫ6.2 Ϫ4.0 Ϫ5.1 Ϫ4.1 Mali GDP at market pricesb 4.0 2.2 6.1 4.9 5.1 5.2 5.3 Current account balance/GDP (%) Ϫ8.9 Ϫ8.4 Ϫ8.3 Ϫ4.9 Ϫ4.6 Ϫ4.9 Ϫ5.2 Mauritania GDP at market pricesb 2.9 5.2 5.4 11.7 2.1 5.7 6.7 Current account balance/GDP (%) Ϫ0.3 Ϫ20.1 Ϫ46.3 Ϫ2.1 Ϫ4.0 Ϫ11.6 Ϫ19.3 Mauritius GDP at market pricesb 5.3 4.7 3.1 3.5 4.1 4.4 3.9 Current account balance/GDP (%) Ϫ1.6 Ϫ1.8 Ϫ3.7 Ϫ5.6 Ϫ8.4 Ϫ8.9 Ϫ7.6 Mozambique GDP at market pricesb 5.2 7.5 6.2 8.5 9.1 7.4 6.7 Current account balance/GDP (%) Ϫ18.2 Ϫ11.1 Ϫ12.6 Ϫ7.3 Ϫ9.0 Ϫ10.2 Ϫ9.2 Namibia GDP at market pricesb 4.2 6.0 4.2 4.6 4.6 4.3 3.8 Current account balance/GDP (%) 4.1 10.0 7.2 13.0 15.0 11.3 10.6 Niger GDP at market pricesb 1.8 0.0 7.0 4.2 4.8 4.5 4.6 Current account balance/GDP (%) Ϫ6.9 Ϫ7.6 Ϫ9.4 Ϫ9.5 Ϫ10.3 Ϫ11.0 Ϫ10.8 Nigeria GDP at market pricesb 2.8 6.0 6.6 5.6 5.9 7.4 6.1 Current account balance/GDP (%) Ϫ0.8 23.4 10.9 13.7 9.2 12.6 9.5 Rwanda GDP at market pricesb 0.2 4.0 6.1 6.4 6.7 5.1 4.7 Current account balance/GDP (%) Ϫ3.5 Ϫ10.8 Ϫ3.9 Ϫ7.1 Ϫ8.3 Ϫ8.2 Ϫ7.4 Senegal GDP at market pricesb 2.9 6.2 5.5 3.1 4.5 5.1 5.3 Current account balance/GDP (%) Ϫ6.0 Ϫ6.7 Ϫ7.0 Ϫ9.6 Ϫ9.7 Ϫ8.4 Ϫ7.6 196 R E G I O N A L E C O N O M I C P R O S P E C T S Table A12 (continued ) (annual percent change unless indicated otherwise) Forecast 1991–2000a 2004 2005 2006 2007 2008 2009 Seychelles GDP at market pricesb 4.6 Ϫ2.0 1.2 5.3 5.5 5.1 5.7 Current account balance/GDP (%) Ϫ7.4 Ϫ9.1 Ϫ23.8 Ϫ28.9 Ϫ30.4 Ϫ28.8 Ϫ20.4 Sierra Leone GDP at market pricesb Ϫ4.7 7.4 7.5 7.5 7.3 6.9 7.4 Current account balance/GDP (%) Ϫ9.0 Ϫ13.1 Ϫ9.3 Ϫ6.0 Ϫ6.5 Ϫ8.3 Ϫ9.0 South Africa GDP at market pricesb 1.8 4.8 5.0 5.4 5.0 5.1 5.3 Current account balance/GDP (%) Ϫ0.2 Ϫ3.2 Ϫ3.8 Ϫ6.3 Ϫ6.8 Ϫ7.8 Ϫ7.7 Sudan GDP at market pricesb 5.7 5.2 8.6 11.8 10.8 9.7 8.1 Current account balance/GDP (%) Ϫ6.7 Ϫ4.1 Ϫ10.9 Ϫ14.2 Ϫ9.6 Ϫ6.5 Ϫ6.6 Swaziland GDP at market pricesb 3.1 2.1 2.3 1.7 1.4 1.1 1.2 Current account balance/GDP (%) Ϫ2.6 4.6 1.5 1.0 0.1 Ϫ3.2 Ϫ2.4 Tanzania GDP at market pricesb 2.9 6.7 6.8 6.2 7.1 6.8 6.7 Current account balance/GDP (%) Ϫ12.5 Ϫ2.2 Ϫ4.8 Ϫ8.0 Ϫ9.4 Ϫ11.0 Ϫ10.2 Togo GDP at market pricesb 2.2 3.0 2.8 1.5 2.3 2.1 2.4 Current account balance/GDP (%) Ϫ8.5 Ϫ10.0 Ϫ5.1 Ϫ5.7 Ϫ6.1 Ϫ9.3 Ϫ7.8 Uganda GDP at market pricesb 6.8 5.5 6.6 5.4 5.5 5.3 5.9 Current account balance/GDP (%) Ϫ7.0 Ϫ3.2 Ϫ2.2 Ϫ4.8 Ϫ3.0 Ϫ5.4 Ϫ4.9 Zambia GDP at market pricesb 0.7 5.4 5.1 5.9 5.3 5.7 5.9 Current account balance/GDP (%) Ϫ10.5 Ϫ10.0 Ϫ8.6 1.6 Ϫ0.7 Ϫ4.6 Ϫ6.2 Zimbabwe GDP at market pricesb 0.9 Ϫ3.8 Ϫ5.3 Ϫ4.2 Ϫ6.3 Ϫ4.9 Ϫ2.1 Current account balance/GDP (%) Ϫ7.5 20.7 25.7 45.0 71.9 81.7 82.7 Source: World Bank. Notes: Growth and current account figures presented here are World Bank projections and may differ from targets contained in other World Bank documents. Liberia, Mayotte, S~ao Tomé and Principe, and Somalia are not forecast because of data limitations. a. Growth rates over intervals are compound averages; growth contributions, ratios, and the GDP deflator are averages. b. GDP measured in constant 2000 U.S. dollars. Recent turbulence in international finan- country avoided sharp asset sell-offs, and the cial markets resulted in a moderate deprecia- all-share Johannesburg Stock Exchange index tion of the rand against the dollar, but that reached new highs. Looking forward, limited followed a period of strong appreciation spillovers to consumption and investment are caused by, among other factors, anticipated anticipated. capital inflows related to merger and acquisi- Exceptional outturns in countries like An- tion activity. The rand has since returned to gola and Sudan underpinned growth among levels prevailing before the period of intense Sub-Saharan Africa’s oil-exporting economies financial market disruptions of July. Volatility (figure A22). In Angola, the region’s fastest- and declines in high-income financial markets growing economy and its second largest oil affected capital markets in South Africa to producer, growth continues to be exception- some degree, but the change was limited. The ally robust, with both oil and non-oil sectors 197 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 growth rose modestly from 5.6 percent in Figure A22 …reaching a 35-year high in 2006 to 5.9 percent, as strong gains in the oil-exporting countries… non-oil sector offset substantial underperfor- Real GDP (percent change) Forecast mance in oil. A 9.5 percent expansion in the 14 non-oil sector during the third quarter of 2007 12 (year-on-year), driven by strong performance 10 8 in agriculture and financial services, pushed 6 overall growth up to 6.1 percent from 5.7 per- 4 cent in the previous quarter. Crude oil pro- 2 duction, including condensates and natural 0 gas liquids, declined 7.1 percent during the Ϫ2 third quarter (year-on-year), bringing output Ϫ4 down 4.2 percent for the first nine months of Ϫ6 2007. This unfavorable result followed a con- 91 00 03 06 09 70 73 76 79 82 85 88 94 97 traction in production of 5.3 percent in 2006. 19 20 20 20 20 19 19 19 19 19 19 19 19 19 Source: World Bank. Economic growth in Mauritania, the region’s newest oil producer, has also been disappoint- ing. Growth there was subdued largely because advancing at double-digit rates. Diamond pro- of a halving in oil output tied to a changeover duction has also been climbing, supplement- in equipment. ing oil revenues and contributing to an in- Members of the Central African Economic crease in the current account surplus. and Monetary Community experienced mixed Nevertheless, the increase in oil production economic performance. For example, strong was an impressive 18.7 percent in the first growth in the non-oil sector in Gabon led to a nine months of 2007 (year-on-year) after ex- considerable pickup in GDP despite a decline panding 26 percent in 2005 and 13 percent in in oil production. Growth also accelerated in 2006. The new oil fields scheduled to come Cameroon, underpinned by strong domestic on line over 2007 to 2009 will ensure strong demand, and on the supply side, by strong growth in the oil sector, while robust growth performance in the transport and telecommu- in agriculture, manufacturing, construction, nications sectors. Meanwhile in the Republic and the power sector will boost activity in the of Congo, growth performance fell off as ex- non-oil sectors to near 20 percent. pansion in the oil sector softened, and delays Also notable among the oil-exporting in public investment affected growth in the economies is an improvement in macroeco- non-oil sector. In Chad, another sharp decline nomic stability, with inflation easing, notwith- in oil production and continued deceleration standing large revenue inflows and stronger in growth within the non-oil sector caused the growth in government spending. Furthermore, economy to contract during the year. recent monetary tightening should help bring Among the region’s oil importers, GDP ad- inflationary pressures in Angola down further. vances were robust, especially in those coun- Both fiscal and current account balances have tries that are further along the reform path, improved tremendously as a result of the oil have achieved greater trade openness, and windfall. The non-oil fiscal balance also has have improved macroeconomic stability (fig- improved, but largely as a result of capacity ure A23). Increases in nontraditional manu- constraints that limit government spending factured exports have helped propel growth in increases. several countries. In East Africa, Tanzania Meanwhile, performance in Nigeria, the re- recorded stronger growth in the agriculture gion’s second largest economy, has improved sector and improved its performance in manu- marginally over the course of 2007. GDP facturing, mining, and construction, pushing 198 R E G I O N A L E C O N O M I C P R O S P E C T S from flooding, slowing growth toward the Figure A23 ...and a 10-year high in end of 2007 into 2008. oil-importing countries In Mozambique, growth continues apace, Real GDP (percent change) with output up 8.8 percent in the first half of Forecast 10 the year, but damage from cyclones and flood- 8 ing slowed the rate of growth from 10 percent recorded a year earlier (year-on-year). The 6 country boosted its GDP with investments of 4 $1.4 billion in the Moatize Coal Project and $390 million in other projects during the first 2 half of 2007. 0 Ϫ2 Medium-term outlook Growth in Sub-Saharan Africa is poised to re- 91 00 03 06 09 70 73 76 79 82 85 88 94 97 19 20 20 20 20 19 19 19 19 19 19 19 19 19 main buoyant by historic standards, nearing Source: World Bank. 6 percent over the near and medium terms, de- spite softening of demand in the Euro Area in 2008 and corrections to non-oil commodity overall GDP gains to 7.1 percent in 2007. In prices, particularly metals, over the medium Kenya, at 6.3 percent, growth should surpass term (table A11). For many countries, the im- a 30-year record set in 2006 (6.1 percent) petus for growth will come in part from ro- based on improved tourism arrivals and re- bust domestic demand, in particular, strong ceipts, stronger gains in transport and com- growth in public and private fixed investment munications, and better agriculture output. (figure A24). Growth accelerated to 7.1 percent in the sec- Fixed investment is expected to remain ond quarter of 2007 (year-on-year) as manu- strong, despite the credit crunch in interna- facturing expanded 8.6 percent, hotels and tional financial markets and the easing in restaurants gained 11.1 percent, and commu- nications expanded 11.8 percent. In Madagas- Figure A24 Contributions of investment car, large inflows of FDI to the mining sector and consumption have increased are generating an important shift in the struc- Contributions to GDP growth (percent) ture of the economy, while Uganda is benefit- 10 ing from strong expansion in construction, 8 transport, and communications, as well as from recovery in agriculture. 6 Growth among members of the West 4 African Economic and Monetary Union also 2 picked up in 2007, rising by almost a full per- 0 centage point to 3.7 percent, as GDP gains ex- ceeded 4 percent in five of the eight Ϫ2 economies. Yet inadequate energy supplies in Ϫ4 many member countries and difficulties in 0 1 2 3 4 5 6 7 08 09 0 0 0 0 0 0 0 0 20 20 20 20 20 20 20 20 20 20 several agriculture subsectors have kept growth from rising even further. Agricultural Private consumption Government consumption output and private consumption will take Fixed investment Net exports some time to recover in several countries in Source: World Bank. the union that sustained significant damage 199 G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 8 non-oil commodity prices. Large, strategic, advances in Angolan and Sudanese crude oil capital projects initiated by big, rapidly–grow- output and anticipated recovery in Nigerian ing, developing economies such as China and production. Lower oil prices by 2009 could India are likely to underpin continued strong yield supply responses, at minimum slowing investment. Among recent notable deals is the the pace of oil output growth for many $5 billion loan agreement reached between smaller producers, where production costs re- China and the Democratic Republic of main high. For the region’s major producers, Congo. According to the signed accord, about however, output is projected to continue to $3 billion will fund large infrastructure pro- increase. jects, including 2,000 miles of railway and Growth in Nigeria is projected to pick up 2,125 miles of highway. The project will also markedly in 2008, buoyed by recovery in the finance the construction of 31 hospitals, 145 oil sector and strong gains in the non-oil sec- health centers, and 2 universities. The remain- tor. Stabilization in the Niger Delta should ing $2 billion will be used to set up a joint allow oil production to recover gradually and venture mining company between the two to exceed 2005 levels, supporting gains near countries. Madagascar and Mozambique are 10 percent in Nigeria’s oil sector, following the also experiencing large-scale FDI flows into contraction recorded in 2007. Investment their economies. growth should moderate, notwithstanding the Several years of strong non-oil commodity government’s plans to invest substantial prices, together with rising private capital in- amounts in roads, railways, and electricity in- flows and remittances, are supporting private frastructure and in the dredging of the Niger consumption, although spending is antici- River. This investment appears highly import- pated to flatten over the medium term as in- intensive, with import sourcing accounting for come growth eases. In South Africa, higher in- some 75–80 percent of expenditure, thereby terest rates and an erosion of real incomes is limiting the direct positive effects on Nigeria’s likely to curb real spending. Furthermore, the growth. sharp decline in farmers’ incomes in those Difficulties in the cotton and groundnut countries affected by recent floods will consti- subsectors in several West African countries tute a drag on consumption, although private, are having negative spillover effects on government, and donor transfers may mitigate growth, while electricity shortages and high some of the effects. According to the latest energy costs are constraining faster expansion estimates, the worst-affected countries are among oil-importing economies. Some coun- Burkina Faso, Ghana, and Uganda. Adverse tries are seeing surges in their oil import bills, spillovers to personal spending will be felt well in part because many companies use fuel-run into 2008. In other countries, recovery from power generators to supplement grid electric- drought is translating into improved perfor- ity. Growth among West African Economic mance in agriculture, adding impetus to and Monetary Union economies will be sup- growth, while the income effect resulting from ported by improved performance in the pri- several years of high prices for non-oil mary sector and increased public investment commodities continues to stimulate private spending, financed from savings made under consumption. the Highly Indebted Poor Countries and Mul- Growth among Africa’s oil exporters is ex- tilateral Debt Relief initiatives. Furthermore, pected to slow to 6.9 percent by 2009, as oil growth in oil-importing economies should prices are forecast to decline that year and as benefit from strong investment growth, as investment projects begin to unwind. How- well as continued demand for non-oil com- ever, this transition occurs from peak 9 per- modities from the rapidly expanding emerging cent GDP gains in 2008 led by continued market economies. 200 R E G I O N A L E C O N O M I C P R O S P E C T S Risks increasing asset prices all boost consumption Among the most important downside risks to through positive wealth effects and make the growth in Sub-Sahara African is a larger-than- risk of a further buildup in inflationary pres- expected falloff in high-income country sures very apparent. growth and import demand. Such a falloff South Africa also faces a specific source of could be tied to continuing difficulties in fi- risk in the way it has financed its sizable cur- nancial markets, or it could be triggered by rent account deficit, anticipated to be in excess weaker growth outturns in major emerging of 7 percent of GDP in 2008 and 2009: the market economies, such as in China and India, country has relied largely on portfolio invest- which might result in weaker export growth ments, which could potentially be reversed. for Sub-Saharan Africa in general, and for the Moreover, a marked depreciation of the rand oil-importing countries in particular. in the event of a sell-off of South African assets The risk of increasing inflationary pressure by nonresidents would present the authorities is also palpable. Should oil prices increase fur- with additional financial management issues to ther or drought conditions affect the food sup- address as well as inflation pressures. ply, inflation could be the consequence. In- Finally, negative terms-of-trade shocks creases in international prices of staple (lower non-oil commodity prices, further commodities such as cereals and vegetable increases in oil prices, or both) may come to af- oils, to a large degree already in the pipeline, fect disposable incomes in oil-importing coun- could spill over to fuel domestic price pres- tries, undermining private consumption while sures, particularly in countries that are heavily also yielding worse external balances. Con- reliant on imports of wheat and vegetable oils. versely, higher oil prices would benefit growth In some countries, strong domestic demand in oil-exporting countries. Sociopolitical ten- and upward adjustments in public sector sions also remain a source of downside risk for wages are already fueling inflationary pres- countries such as Côte d’Ivoire, the Demo- sures. Capacity constraints and overheating in cratic Republic of Congo, Ethiopia, Guinea, some economies, especially the oil-producing Guinea-Bissau, Somalia, and Togo. In Nigeria, economies, constitute further upside risks for the risks associated with the activity of militant inflation. Similarly, in South Africa, high con- groups in the Niger Delta remain substantial, fidence, strong domestic expenditures, rising with oil production still about 25 percent employment, buoyant credit extension, and below the 2.9 million barrels daily capacity. 201 Eco-Audit Environmental Benefits Statement The World Bank is committed to preserv- Saved: ing endangered forests and natural re- • 21 trees sources. The Office of the Publisher • 1247 lbs. of solid has chosen to print Global Economic waste Prospects 2008 on recycled paper with • 7,539 gallons of 30 percent post-consumer waste, in accor- wastewater dance with the recommended standards • 2,300 lbs. of net for paper usage set by the Green Press greenhouse gases Initiative, a nonprofit program sup- • 14 million BTUs porting publishers in using fiber that is of total energy not sourced from endangered forests. For more information, visit www. greenpressinitiative.org. The World Bank GLOBAL ECONOMIC PROSPECTS Global Economic Prospects 2008: Technology Diffusion in the Developing World Global Economic Prospects 2008: Technology Diffusion in the Developing World examines the state of technology in developing countries and the pace with which it has advanced since the early 1990s. It reveals both encouraging and cautionary trends. On the one hand, the pace of technological progress in developing countries has been much faster than in high-income countries—reflecting increased exposure to foreign technology as a result of linkages with high-skilled diasporas and the opening of these countries to international trade and foreign direct investment. On the other hand, the technology gap remains large, and the domestic factors that determine how quickly technologies spread within developing countries often stymie progress, especially among low-income countries. This year’s Global Economic Prospects comes on the heels of an extended period of strong growth and a 15 year period of strong performance in much of the developing world, which has contributed to substantial declines in global poverty. While high oil prices and heightened market volatility may signal a coming pause in this process, over the longer term continued technological progress should continue to push back poverty. New! Prospects for the Global Economy online Your multilingual source (English, French, Spanish) for • Macroeconomic indicators and forecast data, from 1980 to 2008 • Insightful interactive calculators and simulation tools • One-page PDF briefs summarizing countries’ external financial positions and trade • 16 individual commodity reports and price forecasts • Timely analysis of worldwide economic prospects and risks Please visit the new interactive Prospects for the Global Economy Web site at www.worldbank.org/globaloutlook. See other side for order form. WORLD BANK Visit our Web site at The reference of choice on development Publications www.worldbank.org/publications Order Form Title Stock # Price* Qty. Total US$ Global Economic Prospects 2008: Technology Diffusion in the Developing World D17365 US$38 January 2008. (ISBN 978-0-8213-7365-1). * Geographic discounts apply - up to 75% for some countries. 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When ordering directly from the World Bank, make check payable in U.S. funds drawn on Phone _________________________________________________ a U.S. bank to: The World Bank. Please send your check with your order. Fax ___________________________________________________ Institutional customers in the U.S. only: E-mail _________________________________________________ ■ Bill me. Please include purchase order. To Order: World Bank Publications www.worldbank.org/publications By phone: +1-703-661-1580 or 800-645-7247 By fax: +1-703-661-1501 By mail: P.O. Box 960, Herndon, VA 20172-0960, USA Questions? E-mail us at books@worldbank.org DCGP8 WORLD BANK Visit our Web site at The reference of choice on development Publications www.worldbank.org/publications T “Rapid technological progress echnology and technological progress are central to economic in developing countries has and social well-being. The creation and diffusion of goods and been key to the reduction services are critical drivers of economic growth, rising incomes, of poverty in recent decades. social progress, and medical progress. Global Economic Prospects 2008: While the integration of Technology Diffusion in the Developing World examines the state of technology in developing countries and the pace with which it has advanced since global markets has played and the early 1990s. will continue to play a vital role in this, future success It reveals both encouraging and cautionary trends. On the one hand, will increasingly depend the pace of technological progress in developing countries has been much on strengthening technical faster than in high-income countries—reflecting increased exposure to foreign competencies and the business technology as a result of linkages with high-skilled diasporas and the opening environment for innovative of these countries to international trade and foreign direct investment. firms in developing countries.” On the other hand, the technology gap remains large, and the domestic factors that determine how quickly technologies spread within developing — Graeme Wheeler countries often stymie progress, especially among low-income countries. Managing Director Repeating the rapid progress of this past decade will be difficult and may The World Bank require that basic technological literacy is improved further; that government efforts to adapt and disseminate preexisting technologies throughout the economy are strengthened; and that regulatory regimes are modified to encourage business innovation. This year’s Global Economic Prospects comes on the heels of an extended period of robust growth and a 15-year period of strong performance in much of the developing world that has contributed to substantial declines in global poverty. While high oil prices and heightened market volatility may signal a coming pause in this process, over the longer term sustained technological progress should continue to push back poverty. For additional information, please visit www.worldbank.org/prospects. An online companion to the prospects section of this report, including access to additional data and analysis not reported here, is also available at www.worldbank.org/globaloutlook. ISBN 978-0-8213-7365-1 THE WORLD BANK