World Bank Report

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Chapter 1

Overview

event in the history of humanity. During most of 4 million years of evolution, people made limited economic progress and their material well-being changed very little. In the last few centuries, however, goods and services started to be produced at increasingly lower cost in hours of effort.The hours of work needed to produce basic goods such as water or heat at the dawn of civilization were several hundred times those needed today (DeLong 2000). Similar increases in productivity have been achieved for an expanding range of goods and services. Most of this progress has taken place in the last two centuries, during which technological progress has been exceptionally rapid, and economic growth unprecedented (figure 1.1). It is only in the last 50 years that mainstream economics has focused on the determinants of Adam Smith’s “natural progress of opulence” and on how growth could be accelerated. Many questions about growth still lack satisfactory answers.Yet few issues are more important for the world’s future than the ability of developing countries to raise both productivity and the rate at which they accumulate capital. This overview chapter first briefly reviews our understanding of growth before turning, in section 2, to the facts and controversies of growth and policy reforms in the 1990s. Section 3 draws the broad lessons coming out of the growth experience of the 1990s, and section 4 offers lessons specific to key

E

CONOMIC GROWTH IS A RECENT

policy and institutional reforms. Section 5 sketches operational implications. Subsequent chapters set out the facts about growth in more detail, and then examine the main areas in which economic and institutional reforms concentrated during the 1990s—macroeconomic stabilization, trade, financial sector, privatization and deregulation, modernization of the public sector, and political reforms. The chapters aim to draw lessons from gaps between expectations and outcomes. Most chapters are also followed by a Country Note that expands on issues insufficiently dealt with in that chapter, or that considers country-level perspectives. FIGURE 11

Worldwide Growth in Real GDP per Capita, 1000–Present
Century's growth in real world GDP per capita
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% –100% 11th 12th 13th 14th 15th 16th 17th 18th 19th 20th

Century
Source: DeLong 2000.

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E C O N O M I C G ROW T H I N T H E 1 9 9 0 s

1. Understanding Economic Growth
Absent definitive theories, views on growth have been shaped by facts and changed by experience. Until the 1970s, the growth strategies of developing countries focused on accelerating the rate of capital accumulation and technological adoption. Import substitution, state-owned enterprises, controls over the financial sector, central planning, and a variety of price controls and state interventions in the economy were some of the policies that governments used to take the “commanding heights” of the economy and guide resource allocation to areas thought to be most conducive to long-term growth. Confidence in governments was born from their (partial) success in addressing the Great Depression, in expanding production during World War II, and reconstructing Europe and Japan. Economists and policy makers saw that market forces disrupted growth and that governments were able to restore it, and to expand capacity efficiently.The generation of economists that followed, however, familiar with experiences of developing countries in the 1970s and 1980s, saw the waste of enormous resources in illconceived government initiatives, the costs of poor macroeconomic management, and the ease with which well-intentioned public policies could be diverted to serve narrow political or economic interests. Understandably, this later generation of economists and policy makers came to believe that the cost of government failures was considerably larger than the cost of market failures, that government...
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