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Finance … Development September 1979
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World Development Report, 1979—main themes: A summary of the second report by the Bank on major development issues

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1979
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Johannes Linn and Lyn Squire

While the past 25 years have seen substantial progress in the developing world, much remains to be done. Last year’s World Development Report estimated that nearly 800 million people were still living in absolute poverty with incomes too low to ensure adequate food or shelter and without access to essential public services such as education or health care. Accelerated economic growth and the alleviation of absolute poverty therefore remain the central objectives of development. World Development Report, 1979 assesses the international and domestic policy issues which arise in the pursuit of these objectives in four principal areas:

  • The need to develop a more supportive international environment for trade, capital flows, and energy development;

  • the scope and nature of the employment challenge facing the developing countries and the programs and policies that offer the best hope of creating jobs and raising incomes;

  • the importance of achieving balance and complementarity between agriculture and industry to facilitate sustained economic growth and a wide diffusion of its benefits; and

  • the unprecedented rate of urban growth in developing nations and the massive new tasks posed by this shift of population to cities and towns.

International issues

To give perspective to the analysis and policy issues and to suggest the scope of actions that may be required, a quantitative model was used to project the growth rate of developing countries (see Table 1). On the basis of this model, the report anticipates a recovery of economic growth in industrialized and developing countries for the next two decades. Nevertheless, it is projected that some 600 million people will be living in absolute poverty at the turn of the century.

Table 1Growth in GDP and GDP per capita, 1960-90

(Average annual percentage growth rates at 1975 prices)

GDPGDP per capita
1960-701970-801980-901960-701970-801980-90
Low-Income Countries4.24.04.91.81.72.7
Asia4.24.25.01.82.02.8
Africa4.23.03.81.50.21.0
Middle-Income Countries6.45.55.83.92.93.4
East Asia & Pacific7.78.57.64.96.25.6
Latin American & Caribbean5.75.35.72.92.63.2
Middle East & North African7.35.75.54.72.92.8
sub-Saharan Africa5.04.34.42.51.41.4
Southern Europe7.24.95.45.83.44.2
All developing countries5.95.25.63.42.83.3
Industrialized Countries4.93.44.23.82.73.7
Capital Surplus Oil Exporters11.75.65.08.21.82.2
Centrally Planned Economies16.85.54.25.74.63.4
Source: World Development Report, 1979.

East European centrally planned economies only.

Source: World Development Report, 1979.

East European centrally planned economies only.

Economic conditions and policies, however, could combine to generate alternative outcomes. Under more favorable assumptions, developing countries might experience an average annual growth in gross domestic product (GDP) of 6.6 per cent in the 1980s. Then, given appropriate measures to improve the distribution of income in these countries, the number of people in absolute poverty might be reduced to between 300 and 350 million by the end of this century. In contrast, if restrictive international conditions and inappropriate domestic policies were to combine to depress developing country growth to under 5 per cent a year, the number of absolute poor in the year 2000 could well be above 700 million. Although these projections are subject to a considerable margin of error, they emphasize the need to seek every possible means of ensuring that the future growth of developing countries resembles or betters the outcomes projected under the favorable scenario.

The progress which developing countries can make in increasing production, expanding employment, and reducing poverty will depend to a significant degree on the international climate for trade, capital flows, and energy development. The impressive advances made by many of these countries in the 25 years after World War II were greatly assisted by an unprecedented expansion in world output and trade, which was in large measure the result of deliberate international efforts to reduce restrictions on international trade. The deceleration in the growth of world trade in the 1970s is thus of major concern. Efforts to contain or reverse protectionist tendencies will be greatly aided by the restoration of higher growth in the industrialized countries. In turn, accelerated growth and employment generation in developing countries, as a result of expanded trading opportunities for these nations, are in the long-term interest of the industrialized countries. In 1976, developing countries purchased 28 per cent of the total merchandise exports of industrialized countries and 31 per cent of their manufactured exports. Special efforts are therefore needed among industrialized nations to curb protection and increase market access for imports from developing countries, and to assist groups adversely affected by the adjustments in the domestic economic structure resulting from international competition and imports.

On their part, developing countries need to resist the temptation to adopt inwardlooking trade policies, or to delay transition to greater export orientation, despite current difficulties in the international trading environment. The potential market in industrialized countries for exports from developing countries is very large in relation to their current export levels. Export expansion is therefore still feasible despite rising protectionist tendencies, as the recent experience of East Asian economies has shown. The most advanced developing countries can help this expansion by opening up their own markets to imports, particularly those from the poorer nations, from whose growth they in turn can benefit through greater demands for their own relatively more capital-intensive exports.

International capital flows have eased the difficulties encountered by the developing world in adjusting to a less expansionary international environment during the 1970s. The international private capital market has been especially responsive and flexible in meeting the capital requirements of the Middle-Income Countries, for whom over two thirds of the net disbursements of medium-term and long-term capital comes from private sources. The substantial growth in the aggregate indebtedness of developing countries after 1973 led to a heightened concern about their debt problems. In real terms, however, outstanding debt actually grew considerably more slowly in 1973-77 than it did in 1969-73 and the various broad indicators of indebtedness remained acceptable. Moreover, as current account deficits of developing countries declined in 1976 and 1977, and as most of the private debt is owed by countries with good prospects and reasonably sound economic management, the projections for the medium term do not point to a general debt problem for developing countries. However, the sharp increases in petroleum prices in mid-1979 and their repercussions can be expected to strain seriously the financial positions of some developing countries.

Nevertheless, for some countries, liquidity crises such as experienced in recent years in Peru, Turkey, and Zaire can be expected to occur from time to time. These problems have resulted from external factors—such as unforeseen shortfalls in export earnings, or sudden increases in oil import costs—or from domestic policy failures. They have been aggravated by the relatively short maturity structure of private commercial loans, increased foreign exchange reserve requirements, and inadequate methods of dealing with liquidity crises. Efforts to increase the resources of the International Monetary Fund, the World Bank, and other international institutions will strengthen the financial system by improving the overall maturity structure of lending—by increasing the system’s capacity for longer-term lending—and by strengthening the mechanisms for handling individual countries’ liquidity crises. Nonetheless, it will still be necessary to expand the flow of official medium-term capital to developing countries.

Official development assistance (ODA) must play an important role in any strategy for improvements in capital flows to the developing countries. Low-Income Countries, in particular, depend heavily on concessional capital for their development efforts. Net disbursements of ODA from members of the Development Assistance Committee of the Organization for Economic Cooperation and Development, however, are estimated to have amounted to only 0.3 per cent of donors’ gross national product in 1978, far short of the target of 0.7 per cent endorsed by the United Nations General Assembly in 1970. Relatively small percentage increases in real ODA flows could have a substantial impact in reducing absolute poverty in the world.

Although the developing nations as a whole account for a relatively small share of the world’s commercial energy production and consumption, their development prospects are affected directly by curtailed energy supplies and increased prices, and indirectly by the repercussions of disruptions in energy markets on growth in the industrialized world. As recent events have shown, the balance in world demand and supply of energy hinges on what happens in a few key oil exporting countries, to the extent that short-run supply bottlenecks and temporary increases in the real price of oil can be precipitated by events in a single country. However, if prolonged production setbacks in key countries can be avoided, if strong conservation measures are pursued in major consuming nations, and if sustained efforts are made to find and develop new energy resources, the global demand for energy could be met during the next decade without significant and sustained increases in the real price of internationally traded energy.

In the longer perspective, however, there is little doubt that the world has to adjust to higher energy prices and increasing use of more costly energy substitutes for oil. For the developing countries, the major challenges lie in designing policies to develop and encourage the efficient use of domestic energy resources. Most of these countries need to increase investment in the energy sector and to augment their technical, planning, and management systems. International support can greatly aid this effort.

In addition, improved efficiency in the use of energy from traditional sources and conservation, especially for forest resources, can help the poor in these countries to adjust to increasingly scarce and costly energy supplies.

Structural transformation

Employment. International initiatives must go hand in hand with prudent domestic economic management in the developing nations, if the growth of these countries is to be accelerated and the plight of the absolute poor is to be alleviated. One of the principal challenges of development policy is to create enough productive jobs for a labor force that is expanding at unprecedented rates. Though population growth is believed to have peaked in the early 1970s, the earlier growth will add more than half a billion people to the labor force in developing countries between 1975 and the year 2000 (see Chart 1). Given the already high levels of underemployment and absolute poverty, the scale and urgency of the task of expanding productive employment and income opportunities cannot be overemphasized.

Chart 1Labor force estimates and projections, 1950-2000

The large number of people remaining in low productivity jobs, especially in agriculture, has increasingly raised doubts about whether industrialization can provide adequate remunerative employment opportunities. However, the historical experience of the nonindustrialized countries reveals that the slow sectoral transformation of the labor force in the developing countries does not result from an unusually slow expansion of industrial employment, but from unusually fast growth in the labor force. High rates of unemployment are also endemic, particularly among those joining the urban labor market for the first time. Unlike the underemployed or working poor, however, the unemployed are not necessarily among the poorer income groups, because only those with access to unearned income are able to finance a period of unemployment while they search for a satisfactory job.

Promoting agricultural growth and encouraging the efficient use of rural labor are the most important means of creating more remunerative jobs in developing countries, as agriculture remains the single most important source of employment and provides a large market for industrial output. Particular attention should focus on support for the small farm sector which has shown remarkable capacity in various countries to provide employment opportunities for rural labor. Land redistribution and the widespread distribution of credit and extension services constitute an important part of an agricultural strategy to generate employment.

Capital Surplus Oil Exporters: Kuwait, the Socialist People’s Libyan Arab Jamahiriya, Oman, Qatar, Saudi Arabia, and United Arab Emirates are identified as a separate group from other developing countries since, at least for the near future, their economic characteristics are significantly different. Other major exporters of oil are grouped among the developing countries.

Centrally Planned Economies are Albania, Bulgaria, the People’s Republic of China, Cuba, Czechoslovakia, the German Democratic Republic, Hungary, the People’s Democratic Republic of Korea, Mongolia, Poland, Romania, and the Union of Soviet Socialist Republics.

Developing Countries are divided on the basis of 1977 gross national product per capita into:

Low-Income Countries—with per capita income of US$300 and below; and

Middle-Income Countries—with per capita income above US$300.

Industrialized Countries are the members of the Organization for Economic Cooperation and Development, apart from Greece, Portugal, Spain, and Turkey, which are included among the Middle-Income developing countries.

Appropriate industrial policy is especially important for ensuring adequate employment growth in the Middle-Income nations. Despite their obvious abundance of labor many developing countries have followed a strategy of industrialization that economizes on labor rather than on capital, either directly, through public sector projects, or indirectly, by artificially lowering the price of capital to modern and large-scale private industry. A reversal of these biases in public investment and incentive patterns should contribute to increased use of labor by industry, particularly when combined with foreign trade policies designed to foster the growth of labor-intensive export industries. Measures geared to place small enterprises on an equal footing with large firms in terms of access to credit, technical assistance, and marketing support can also contribute to this goal.

For the longer run, population programs are urgently required to reduce future labor force expansion. Declining fertility rates have been associated with increasing urbanization, improved education, and extensive participation of women in the labor force, but active efforts to promote population planning programs can also contribute to fertility reductions.

Industrialization. The process of industrialization is a key ingredient in the structural transformation of development and growth. In Middle-Income Countries, high rates of industrial growth have sustained overall income growth and have raised the share of industry from 32 per cent of GDP in 1960 to 37 per cent in 1976. In Low-Income Countries industrial output has grown more slowly (see Table 2).

Table 2Structure and growth of production, 1960-76

(In per cent)

Distribution of GDP

(At current prices)
AgricultureIndustryServices
196019761960197619601976
Low-Income Countries503817243338
Middle-Income Countries221532374648
Industrialized Countries6440385458
Source: World Development Report, 1979.
Average annual growth rate, 1960-76

(At 1975 prices)
AgricultureIndustryServices
Low-Income Countries2.16.05.2
Middle-Income Countries3.17.66.7
Industrialized Countries1.34.94.2
Source: World Development Report, 1979.
Source: World Development Report, 1979.

Increases in agricultural productivity and incomes are important not only on their own account but also because they generate domestic demand for industrial products and provide much of the foreign exchange and fiscal resources needed to support industrialization. For the very same reasons agriculture retains considerable importance even in Middle-Income Countries. Given the importance of the mutually beneficient links between agricultural and industrial development, successful industrialization in developing countries has usually been supported by sustained and broad-based agricultural growth.

Many policies, especially the provision and pricing of industrial infrastructure, trade policies, industrial licensing schemes, and price controls, influence the pace and pattern of industrial growth. Flexible planning procedures can save costs by coordinating the many interdependent facets of industrialization and by arranging the efficient timing, scale, location, and phasing of investments, particularly in the more industrialized developing countries. Public intervention in training indigenous entrepreneurs and technicians, in building up financial markets, and providing direct assistance through major publicly supported development banks can assist in removing bottlenecks that often have impeded industrial growth in developing countries.

In many of the Middle-Income Countries, as well as in a few Low-Income Countries with large and sophisticated industrial sectors, the further growth and deepening of the industrial structure calls for increased attention to acquiring, learning, and adopting new industrial technologies; to establishing new institutions, such as export credit agencies, while making existing institutions, especially public enterprises, more responsive to cost and market pressures; and to mastering the design, production, and marketing of new manufactured exports.

Urbanization. In the wake of rapid over-all population growth and industrialization, the urban populations in developing countries are growing at explosive rates. Between 1950 and 1975, urban communities in developing countries had to absorb about 400 million additional inhabitants. In the subsequent 25 years the increment is likely to be close to one billion people (see Chart 2). This pace of urban growth is posing unprecedented challenges for national and municipal policymakers.

Chart 2Urban population estimates and projections, 1950-2000

To some extent, the rate and pattern of urbanization can be moderated by decreasing natural population growth and improving agricultural development. And in many developing countries, the elimination of biases in government policies that favor large cities through public investment, foreign trade incentives, and transport and energy pricing could induce a more balanced pattern of urban growth. The central task facing national and urban planners is to devise and implement policies to encourage the efficient and equitable growth of cities. Instead of the traditional solutions to overcrowded cities—involving bulldozing slums, banning street vendors and customary modes of public transport from public places, and building high-cost public housing, subways, and limited-access highways, all of which primarily serve the interests of wealthier residents—urban investment and regulation policies should be designed to expand those forms of transportation, housing, sanitation, and other services which meet the needs of the majority of the urban population, including the poor, at low cost.

Housing is of special concern in urban areas. The past response to urban housing needs has too often been limited to the construction of a few costly public housing schemes. A more appropriate public policy would involve eliminating impediments to private initiative and providing those elements of housing supply—sites, low-cost water, sanitation and other services, security of tenure, and construction loans—which the private sector is least able to supply. Recent sites and service schemes and slum upgrading programs have shown that even poor beneficiaries are willing to pay the cost of improved housing, as long as these costs are in line with the beneficiaries’ ability to pay and project design pays heed to their preferences. To achieve these aims, almost universally, fresh initiatives are required to improve the institutional framework of urban public management and administration.

Country groups

World Development Report, 1979 considers these major international and domestic policy issues as they apply to three distinct groups of countries, most of which are Middle-Income. The first group comprises the more industrialized nations, including, for example, Brazil, Korea, Spain, and Turkey. Such countries have relatively high shares of manufacturing in production and exports and are generally among the wealthier Middle-Income Countries. The second group of countries are the economies in which the mining sector looms large in production and trade. The third group comprises predominantly agricultural nations. These fall into two broad categories: those countries which have chosen to adopt an export orientation based on deepening and broadening their specialization in agriculture, such as Ivory Coast and Malaysia, and those countries which have tended to neglect their existing agricultural export sector in favor of industrial import substitution, such as Burma, Ghana, and Sri Lanka.

World Development Report, 1979 highlights the crucial role of development strategies and policies, especially as these apply to employment creation, industrialization, and urbanization. It also shows that for these policies to yield their full potential, support from a liberal international environment for trade and capital flows and a prudent international approach to energy development are essential. Further deterioration in the international framework for trade and capital flows would damage both industrialized and developing countries, and make more intractable the daunting tasks the latter face of expanding employment and alleviating poverty.

World Development Report, 1979 is available in English from Oxford University Press in the United States and Great Britain (which serves all of Europe as well) and its branches and agents throughout the world; in French, from Economica, 49, rue Héricart, 75075 Paris, France; and in Spanish from Editorial Tecnos, O’Donnell 27, Madrid 9, Spain. Where such service is not available, or does not meet readers’ needs, and for copies in Arabic, German, and Japanese, write Publications Unit, World Bank, Washington, DC 20433, U.S.A.

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