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TitleWorld Development Report 1997: The State in a Changing World
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Table of Contents
                            World Development Report 1997
		1 The Evolving Role of the State
		2 Refocusing on the Effectiveness of the State
		3 Securing the Economic and Social Fundamentals
		4 Fostering Markets: Liberalization, Regulation, and Industrial Policy
		5 Building Institutions for a Capable Public Sector
		6 Restraining Arbitrary State Action and Corruption
		7 Bringing the State Closer to People
		8 Facilitating International Collective Action
		9 The Challenge of Initiating and Sustaining Reforms
		10 The Agenda for Change
	Technical Note
	Bibliographical Note
	Appendix: Selected Indicators on Public Finance
		1 The pathway to a more effective state
		2 Credibility, investment, and growth
		3 The regional agenda
		1.1 State and government: Some concepts
		1.2 U.S. government action to support market development: Some examples
		1.3 Evolution of the role of the state in India: The past fifty years
		1.4 The economic rationale for state intervention and some definitions
		2.1 Building the Internet: A contemporary example of fruitful public-private interaction
		2.2 Measuring the state-its size, its policies, and its institutional capability
		3.1 Weaknesses in fundamentals constrain firms the world over
		3.2 Standing up to crime in Cali, Colombia
		3.3 Contracting and the judicial system in Brazil
		3.4 International track records on fiscal deficits and inflation
		3.5 Commitment versus flexibility in the CFA zone
		3.6 Private provision of social services: A historical perspective
		3.7 The new Chilean unemployment insurance scheme
		3.8 Reducing poverty in Indonesia-how social assistance complements broad-based growth
		4.1 Mexico's deregulation czar
		4.2 Six objections to privatization-and how to address them
		4.3 How government supervision averted financial disaster in Malaysia
		4.4 Telecommunications regulation in Jamaica
		4.5 Environmental activism in Yokohama, Japan
		4.6 Japan's postwar big push in metals industries
		5.1 Laying bureaucratic foundations: The Northcote-Trevelyan reforms in the United Kingdom
		5.2 Australia's mechanisms for transparent, competitive, and results-oriented policymaking
		5.3 The mushrooming of Bangladesh's government
		5.4 Vouchers and school choice
		5.5 Contracting with NGOs for better schooling in Bolivia
		5.6 Cultivating the best and the brightest: Mandarin versus open systems
		5.7 Building worker dedication: Good government in Brazil's Ceará State
		6.1 How popular participation improved property rights and dispute resolution in Peru
		6.2 Urban political machines in the United States and their reform
		6.3 Fighting corruption in Uganda
		6.4 Hong Kong's independent commission against corruption
		7.1 Public opinion and the state
		7.2 Managing multiethnic societies in Malaysia and Mauritius
		7.3 Does social capital matter?
		7.4 Client surveys to motivate service improvements in India, Uganda, and Nicaragua
		7.5 Does participation improve project performance?
		7.6 Pitfalls in intergovernmental relations: The experiences of Brazil and China
		7.7 Calculating fiscal equalization grants
		8.1 The World Trade Organization-an international mechanism for bringing credibility to national policy
		8.2 How international agricultural research benefits donors as well
		8.3 The challenges of global climate change for international cooperation
		8.4 Sharing the burden of environmental protection
		8.5 How large the global peace dividend?
		9.1 Weighing the political costs and benefits of reform
		9.2 The predatory state under the Duvalier dynasty in Haiti
		9.3 Reform under external threat: The Meiji restoration in Japan
		9.4 The Moncloa Pacts in Spain
		9.5 Venezuela's 1989 reform program and its reversal
		10.1 State collapse and beyond in Somalia
		10.2 The economic underpinnings of conflict: The case of Liberia
	Text Figures
		1 The state has grown everywhere
		2 A range of mechanisms can enhance state capability
		3 Factors associated with corruption
		4 Higher government employment often means lower government wages
		5 Countries with good economic policies and stronger institutional capability grow faster
		1.1 One world, many more states
		1.2 Governments the world over have expanded since 1960
		1.3 Transfers and interest payments have grown
		2.1 The state, institutions, and economic outcomes
		2.2 Good government helps explain the income gap between East Asia and Africa
		2.3 Reliable institutions make for credible states
		2.4 Perceived credibility and economic performance go hand in hand
		3.1 The lawlessness syndrome
		3.2 Negotiating with government officials can be arduous
		3.3 Countries are discovering the advantages of the value added tax
		3.4 Unlike Nigeria, Indonesia managed its recent oil windfall prudently
		3.5 Well-designed budgetary institutions help avoid large deficits
		3.6 In Vietnam, the benefits of hospital care are skewed toward the better-off
		3.7 The balance of private and public education differs enormously worldwide
		3.8 Pensions and other transfers have crept upward in the industrial countries
		3.9 Housing subsidies in developing countries mostly fail to reach the needy
		4.1 Bank crises are all too common and carry enormous fiscal cost
		5.1 Guinea's policy goals and spending allocations do not add up
		5.2 Decisionmaking in Ukraine is bogged down by overlapping responsibilities
		5.3 Most firms rate government services poorly, but some services score higher than others
		5.4 Three strategies for improving government service delivery
		5.5 Recruiting and promoting on merit improve bureaucratic capability
		5.6 Lack of meritocracy and poor pay in the Philippines' civil service have lowered capability
		5.7 In Africa, as public employment has risen, wages have fallen
		6.1 High and unpredictable corruption hurts investment
		6.2 Some factors associated with corruption
		7.1 The world has become much more democratic since 1980
		7.2 Organizations at the interface of state, markets, and civil society
		7.3 Vertical rules and horizontal incentives shape local government's capability
		8.1 Many countries are loosening restraints on international capital
		8.2 Refugees have been flooding Africa, Asia, and Europe
		8.3 Poor policies nullify the effect of aid
		9.1 Older workers will lose from reforming pensions, but the young will gain
		9.2 Multiple veto points help countries resist pressure to expand welfare
	Text Tables
		1.1 Functions of the state
		3.1 Social insurance, social assistance, and poverty-targeted programs in developing countries: Characteristics and lessons
		3.2 Implicit pension debt in selected countries
		4. 1 Estimates of welfare gains from deregulation in the United States
		4.2 The variety of regulatory experience
		5.1 Mechanisms to improve service delivery
		7.1 Changes in subnational finance in selected countries
		7.2 Demand and supply characteristics of local and national public goods
		7.3 Possible tax and expenditure assignments by level of government
		7.4 Principles and best practices in grant design
		7.5 Matching decentralization strategy to government capacity
		9.1 Alignment of interest groups, political costs, and tactical sequencing of reform by reform type
		9.2 Estimated efficiency gains from privatizing utilities in Argentina
		9.3 First- and second-generation reforms
Selected World Development Indicators
	Introduction to Selected World Development Indicators
	Key and Primary Data Documentation
		Table 1 Basic indicators
		Table 2 Macroeconomic indicators
		Table 3 External economic indicators
		Table 4 Population and labor force
		Table 5 Distribution of income or consumption
		Table 6 Health
		Table 7 Education
		Table 8 Commercial energy use
		Table 9 Land use and urbanization
		Table 10 Forest and water resources
		Table 11 Growth of the economy
		Table 12 Structure of the economy: production
		Table 13 Structure of the economy: demand
		Table 14 Central government budget
		Table 15 Exports and imports of merchandise
		Table 16 Balance of payments
		Table 17 External debt
	Table I a. Basic indicators for other economies
	Technical notes
	Data sources
	Classification of economies
Document Text Contents
Page 140

1 3 0 W O R L D D E V E L O P M E N T R E P O R T 1 9 9 7

Table 7.5 Matching decentralization strategy to government capacity

Central government capacity
Local government




Cautious decentralization strategy with pilot

Delegation of some functions to NGOs and


Deconcentration of some priority services

Delegation of some functions to NGOs and

Massive institutional strengthening at both
levels, particularly in public finances (most Sub­
Saharan African countries)

Targeted strengthening of local entities during
transfer of responsibilities (e.g., Hungary,
Mexico, Thailand)

H igh Separatist or secessionist tendencies

Delegation or devolution according to priorities of
governments (e.g., Santa Cruz Province, Bolivia;
parts of former Soviet Union)

Delegation or devolution of functions according
to government priorities and preferences as well
as articulated needs (most industrial countries)

sound intergovernmental rules are in place to restrain
arbitrary action at the central and the local levels.

• At the local level, states should focus on the processes
and incentives for building accountabiliry and compe­
tition. Where local governments are weakly account­
able and unresponsive, improving both horizontal ac­
countabiliry (to the public) and vertical accountabiliry
(to the center) will be a vital first step toward achieving
greater state capability.

Certain dangers are inherent in any strategy aimed at
opening and decentralizing government. Expanded
opportunities for voice and participation increase the
demands made on the state, which can increase the risk of

gridlock or of capture by vocal interest groups. And if no
clear-cut rules impose restraints on the different tiers of
government, and no incentives encourage local account­
ability, the crisis of governance that now afflicts many
centralized governments will simply be passed down to
lower levels. However, as Part Four of this Report argues,
the obstacles on the path to reform of the state are not
insurmountable. The first step toward bringing govern­
ment closer to people will be to make the objectives of
reform clearly intelligible to citizens and the business
community. Efforts at communication and consensus
building will have a double benefit, increasing the support
for reform as well as arming the government with a better
sense of how to do it right.

Page 141



CHAPTER 7 EXPLAINED HOW NEW PARTNERSHIPS AND competitive pressures can enhance the state's effec­
tiveness at home. But the challenge of reforming the state
does not stop at the state's borders. In an increasingly
interdependent world, one country's actions will often
have implications for its neighbors and for the rest of the
world. And there is a growing recognition that some
needed public goods and services can only be secured
through international cooperation. Thus, building state
capability will mean building more-effective partnerships
and institutions internationally as well as at home.

The need for international cooperation stems from
global and regional manifestations of the problems de­
scribed in earlier chapters, such as missing markets and the
presence of externalities. World peace, a sustainable global
environment, a single world marketplace for goods and
services, and basic knowledge are all examples of interna­
tional public goods. They will be underprovided without
conscious, concerted, and collective efforts to provide
them. Development aid, although not a public good in the
strict sense, also justifies international cooperation because
of global equity considerations.

This chapter discusses the ways in which governments
might hel p ensure more effective global provision of inter­
national public goods. It begins by examining the volun­
tary mechanisms already established to coordinate inter­
national collective action. Although the evidence is clear
that cooperation to achieve global collective goals brings
global benefits, not every such action will bring benefits
for all. Hence it will not always be in every country's inter­
est to participate. Some international public goods may
simply not be valued as highly by some countries as by
others, and sometimes the domestic costs of complying
with an agreement may outweigh the benefits. A major
lesson of experience with voluntary agreements is that

they achieve little when countries have signed on without
fully understanding, or accepting, the likely costs.

Funding and provision of international public goods

Not so long ago the standard policy advice with regard to
the provision of public goods relied almost exclusively on
state intervention. Depending on the circumstances, the
prescription might be to introduce a subsidy, a tax, a new
liability rule, a new regulation, or a new program for direct
public provision of the good in question. But this approach
usually fell flat when it carne to the provision of interna­
tional public goods. In a world of sovereign nations, volun­
tary cooperation becomes the only answer. But why would
countries undertake cooperatively actions that they have
little or no incentive to carry out individually?

Experience and a better understanding of how eco­
nomies work have since led us to recognize a richer set of
motives for collective action and to devise better institu­
tional arrangements for carrying them out, be they
national or global. As previous chapters have shown, states
are setting aside monopolistic, command-and-control
approaches to governing in favor of a more participatory
approach involving civil society, markets, and local
authorities. At the global level, the participatory approach
goes a step further, since it relies on international cooper­
ation without the use of coercive power. Today, the key
mechanisms for the provision of international public
goods are based entirely on voluntary action.

In international markets for trade and investment,
countries have collaborated to develop common rules
and norms of conduct and to institutionalize them
through various formal arrangements. These have in­
cluded regional arrangements such as the Asia-Pacific Eco­
nomic Cooperation (APEC) forum and Mercosur in
South America, as well as multilateral ones such as the

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