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Reflections on Development Economics After the Crisis

We took advantage of the ABCDE conference in Stockholm during May 31-June 2, 2010 to hold side discussions with 15 high-profile academics and researchers. We were expecting that they would tell us that economic development thinking should be revisited in the light of the crisis, but surprisingly, the responses were that likely no. Views fell in two broad camps - first, that it is too early to say because the evidence has not yet been fully studied; and second, as far as the poor are concerned, the crisis is a 'tempest in a tea-cup' as the bottom 20% of the population living close to the poverty line of $1.25 per day are in 'perennial' crisis, are always at risk and vulnerable.

The finer grain of the researchers' reflections highlighted six main aspects:

(1) Those focusing on extreme poverty alleviation underscored that even before the crisis markets were not working for the poor. The crisis unfortunately furthers highlights this and will probably impede further efforts to fight against poverty. Financial markets were singled out as particularly deficient. It was observed that globalization has widened the income inequality with haves at one end and poverty traps at the other end. Some of our interlocutors went further to say that the bottom 20 percent do not have physical capital/assets to use as a stepping stone, and a solid enough human capital base, and therefore end up being forced to eke out a living relying on natural capital (environmental assets) and social capital precluding any possible accumulation.

Several researchers also implicitly argued then that the relevant question for development specialists was not one of shift in diagnostic or prevailing conditions, but rather one of change in focus of attention, with more efforts to be put towards understanding the environmental and institutional determinants of extreme poverty. For instance, the statist model of food for work or aid for pro-poor projects is not working and alternative interventions are needed. More attention to local communities and environment, and micro-based individual incentives is needed. Poverty coexists with very fragile social and ecologic systems, which the crisis can impact greatly and which down the line might lead to a much bigger crisis - the social crisis which is reflected in site-specific natural degradation and violent struggles, be it in Nigeria, Sudan, India, Nepal or elsewhere.

(2) Poverty is determined at very early stages. As we now know from maternal surveys and early childhood programs, poor pregnant women often suffer from insufficient nutrition, iodine deficiency and inadequate pre-natal care, all of which are suppressing human capabilities at 'womb' and jeopardizing the future in a big way as the gap between the poor child and the well-off child can never be bridged. This reinforces the message that efforts upstream, including considering the natural and social environments in which poverty arises are required.

(3) Global common problems, of which global climate change and the management of natural resources and biodiversity are by far the most important, and deserve an increasing share of our attention. A more subtle understanding of these issues is also required, as policy answers should not privilege one exclusive solution (government driven for instance), but incorporate several levels of interventions at the institution, geographic and stakeholder levels. Also, a change occurring is that markets are starting to factor in these global common problems in the prices of commodities and environmental resources, which will create new specific constraints to development and poverty alleviation.

(4) An outcome of the crisis, the state's role is now expanded in a more positive-action mode in the form of fiscal stimulus to protect aggregate demand, finding domestic solutions to the crisis in the form of social protection, industrial policies, protecting jobs, and in focusing on domestic resource mobilization to generate savings needed for infrastructure and social investments (rather than depending on capital flows which declined sharply during the crisis). The consensus among researchers is that there is indeed a role for the State, but also that the crude dichotomy of neo-classical versus government-led management of the economy is a thing of the past. The function of the State matters, but one should beware that the state itself can be 'captured' by elites, and therefore its redistributive function (transfers and safety nets) is diverted to the non-poor. State capacity also matters a great deal as a determinant of long term growth. While there have been less armed conflicts in the past decade than before, the occurrence of fragile states is not a diminishing problem. The issue of state capacity to deliver services and the rise in informality are correlated as well. Teachers and health personnel are not delivering services to the poor: extremely poor people are absent of State statistics and ignored by government policies. The crisis will result in public expenditure cuts which will only exacerbate the non-delivery of services to the poor. There is also exploitation of the poor at the local level as local institutions are also captured. So strengthening of community organizations may be the only available option to improve development effectiveness.

(5) The crisis has lead to a break down in trust - the trust in financial and governmental institutions to pursue good policies and the trust among people to play by the rules in a society when the bad behavior of financial institutions is rewarded. There is now a withdrawal of trust among citizens and new rules and regulations are not the only thing needed - an important cement of societies is made of unwritten rules of what is acceptable and what is not and this is not something that can be legislated. Stakeholder and community management, recognition of these customary rules is therefore a necessity for successful development.

(6) Finally, there is a trade-off between short and long run interventions. By focusing on crisis response and stimulating growth, we are still not dealing with the longer term issues of poverty reduction, improving quality of education, dealing with jobless-growth, reducing income inequality, and ensuring sustainable development, including managing limited natural resources. The world is not focusing enough on priorities such as under-nourishment and early childhood programs, and solving coordination problems that lead to overuse and depletion of resources. There is a danger that short-term myopia may end-up self defeating in the long-term as immediate gains will mask more important time-bombs.

This post originally appeared on the World Bank Institute's Growth and Crisis blog on June 15, 2010.

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