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Finance & Development, September 1980
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World Development Report, 1980—principal themes: A review by World Bank staff of the global economic situation and prospects with special emphasis on the development of human resources

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1980
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The World Development Report, 1980 was prepared by Nicholas Hope, Paul Isenman (team leader), Timothy King, Peter Knight, Akbar Noman, Rupert Pennant-Rea, and Adrian Wood.

In the World Development Report, 1979 industrialization, employment, and urbanization were the main issues addressed. The 1978 Report was concerned with the problems and prospects of low-income Asia and sub-Saharan Africa.

Developing countries start the decade facing two major challenges. First, they must strive to continue their social and economic progress in an international climate that is less helpful than it was a decade — or even a year — ago. Second, they must tackle the plight of the 800 million people living in absolute poverty, who have benefited far too little from past progress. The World Development Report, 1980 examines some of the difficulties and prospects in both areas, looking as far ahead as 2000, but paying particular attention to the next 5 to 10 years.

One of its central themes is the importance of people in development. Adam Smith’s observation on the first page of the Wealth of Nations that the prosperity of a nation is determined mainly “by the skill, dexterity, and judgment with which its labour is generally applied” has lost none of its truth. In the difficult economic conditions of the past six years, as in earlier years, most of the fastest growing developing countries without oil have had well-educated populations. Better health and more education can also help the poorest people escape their poverty.

Summary of prospects for growth(Average annual percentage growth, 1977 prices)
Country groupPopulation 1980 (In millions)GNP per capita, 1980 (In 1977 U.S. dollars)Growth of GNP (High case)Growth of GNP per capita
Low caseHigh case
1980-851985-901970-801980-851985-901980-851985-90
Low-income oil importers1,1331684.14.60.91.01.31.72.4
Sub-Saharan Africa1411863.13.80.2−0.30.10.11.1
Middle-income oil importers7011,2754.95.73.12.02.42.63.5
Oil exporters4567536.35.93.53.03.03.53.4
Industrialized countries6717,5993.34.02.42.52.52.83.5

The economic outlook

As in the two previous editions of the World Development Report, economic projections for the developing countries have been carried out, drawing on the World Bank’s analysis of what determines country and regional growth. This year the analysis has been extended to provide separate estimates for oil-importing and oil-exporting developing countries, as well as by region and income level (see the table). These projections are intended to illustrate the likely outcome of different policies, rather than to provide precise forecasts. Thus, two sets of projections are presented; one—the Low case—showing an unsuccessful adjustment to current economic difficulties, the other—the High case—a much more successful adjustment.

Higher oil prices have improved the outlook for the fifth of the developing world’s population that lives in oil-exporting countries; their average per capita gross national product (GNP) could grow at 3 to 3.5 per cent a year in the first half of the 1980s. But for the four fifths that live in oil-importing countries, the first half of the decade will involve slower growth. For developing countries as a whole, growth will be substantially below that forecast in last year’s Report.

Governments of oil-importing developing countries must take steps to reduce current account deficits and adapt to more expensive energy—at a time when demand for their exports from industrialized countries has slowed, not just because of the rise in energy prices but because of cyclical and structural problems as well. If the less optimistic forecast is realized, the growth of GNP in oil-importing developing countries could fall to 1.8 per cent per capita a year (the Low case). Prospects for the low-income oil importers would be particularly bleak in this scenario: per capita income in low-income sub-Saharan Africa would decline; and the number of people in absolute poverty in the developing world as a whole would increase.

This Low case (or an even worse outcome) could come about — but it need not. In the High case the oil-importing developing countries would grow at 2.4 per cent per capita a year in 1980-85, and by 1990 there would be 80 million fewer people in absolute poverty than in the Low case. This would require that developing countries adjust successfully — cutting their external deficits by raising exports rather than lowering imports, while increasing both investment and the efficiency with which resources are used. It would also require strong support from the industrialized countries and capital-surplus oil exporters—in stimulating demand for developing country exports, in recycling oil surpluses, and in providing aid. But even in the High case, the growth of per capita income in the developing countries will not match that in the industrialized countries. Taking the steps needed not just to attain, but to exceed, the High case is thus the principal development challenge of the next five years.

The success of the adjustment by developing and other countries to the economic circumstances of the early 1980s will not only largely determine their growth during that period but will also affect the chances of an acceleration of growth in the second half of the decade. With recovery in the industrialized countries and in world trade and with continued sound domestic economic policies, the oil importing developing countries could grow almost as rapidly (3.2 per cent) as the oil exporters (3.4 per cent) and faster than in the 1970s. Without recovery and successful adjustment, the growth of the oil exporters would be almost half a percentage point lower, and that of the oil-importing countries a full percentage point lower. Much of the first part of the Report is about the policy decisions that will determine the actual outcomes, in both the near term and the longer term.

External factors

Trade. The ability of developing countries to afford the imports they need for growth depends crucially on their exports to the industrialized countries, which currently constitute two thirds of their market. The industrialized countries, even those determined to combat inflation by restraining growth, must minimize the effects this restraint will have on the developing world. This means expanding the volume of imports, maintaining the relatively free trading opportunities that now exist for most products, and starting to remove the barriers against other goods of particular importance to developing countries, such as textiles, clothing, leather goods, electronics, steel, and some agricultural commodities. To do so would increase the localized problems of structural change in the developed countries. But there are internal remedies for these problems, and liberalization of trade will pay off in faster productivity growth and lower inflation, as well as in increased demand from the developing world for the exports of industrialized countries. The oil-exporting nations can also help by rapidly expanding their imports from developing countries.

Energy. The developing countries that import oil have been hard hit by the price explosion of the past 12 months and can expect their energy costs to rise further in real terms. At the same time, the modernization of their economies will spur demand for energy; so they face a continuing need to adapt to the rising cost of imported oil. They will find this easier if oil-exporting countries can avoid supply disruptions and sharp price changes. More generally, the world economy will perform better if oil prices follow a smooth path; violent fluctuations play havoc with internal resource allocation and the external payments system. Reliable supplies and smooth price changes will be more likely if developed countries improve their energy conservation and develop alternative sources.

Capital flows. Current account imbalances will be large in the next few years, again requiring special efforts to recycle finance to oil-importing countries, especially in the developing world. There is a serious risk that reluctance or inability to finance large external deficits will lead to lower levels of trade, investment, and economic-efficiency — hence, of growth — than anyone would wish. Even in the later years of the 1980s, when the severity of payments imbalances is expected to diminish, the growth of developing countries will continue to depend on inflows of foreign capital (see Chart 1).

Chart 1Net flows of medium-term and long-term capital to developing countries, 1980 and 1990 (High case)

(In billions of current U.S. dollars)

For the low-income countries, which can borrow little commercially, this means more aid. There is a real danger that the modest aid increases projected in the Report will not be achieved. In their own long-term interests, as well as those of the developing countries, both industrialized and oil-exporting countries should make every effort to expand their aid relative to GNP, even in periods of domestic stringency. And they should concentrate their aid even more than they do at present on low-income countries.

Commercial capital, mainly from banks but also from the bond market, private direct investment, and official sources, will be available to help the middle-income countries. But not all countries will be well placed to borrow much more from private commercial sources; without additional financial assistance from other sources, their growth will slow down. In particular, there is not enough long-term program (non-project) finance to support the structural changes required in many countries. Some will benefit from the structural adjustment lending of the World Bank and assistance from the International Monetary Fund. Enlarged official flows of this sort, particularly from multilateral agencies, could and should play a larger role.

Internal factors

While powerfully influenced by the international environment, the progress of developing countries depends even more on their own policies and initiatives.

Trade and energy. In trade, the developing countries can use pricing and other policies to stimulate their production of internationally traded goods—both exports and import substitutes. But they should recognize that bias toward import substitution reduces efficiency and discourages exports. With regard to energy, they, like the industrialized countries, can minimize the loss of real income caused by higher oil prices through conservation and greater domestic energy production.

Investment and production efficiency. In attracting (especially commercial) finance, and in speeding development more generally, trade and energy strategies play an important role. So do other policies that increase investment, improve administration, raise agricultural productivity, and make better use of capital, labor, natural resources, and imports.

Human development. The internal factor on which this Report focuses is the human one: the role not only of education and training, but also of health and nutrition. In addition to the important direct benefits that programs in these areas confer, the Report stresses another aspect, long-standing but often neglected—the role of human development as investment, contributing to growth. The importance of technical, professional, and managerial skills is well known. Less well known but firmly established by research is the importance of primary education, which affects the knowledge and attitudes of farmers and other workers.

Investment in human resources, like other kinds of investment, can be ineffectual unless it is complemented by other productive inputs and by policies to ensure that resources are efficiently used. Programs to develop human resources must also be chosen carefully and carried out efficiently. Despite these qualifications, there is strong evidence to show that human development can make a valuable contribution to growth.

Studies at the firm, farm, and project level have shown that better education, health, and nutrition can raise incomes and productivity, and that the economic rate of return to investment in schooling is high, frequently well above that to physical investment. For primary schooling, the rates of return in a large group of countries average more than 20 per cent. At the aggregate level, cross-country comparisons show that developing nations with higher literacy rates have grown faster, even when allowances are made for other influences on growth and for reverse causation — the effect of growth on literacy. This finding is reinforced by case studies and historical evidence.

Population. One important way in which human development contributes to raising average incomes, as well as to other social goals, is in reducing population growth. Reducing fertility is not an end in itself; but lower population growth in most developing countries tends to result in greater per capita investment in physical capital and human skills—and thus in faster growth. Better nutrition and health, by lowering infant mortality, are essential ingredients of fertility decline. So is education, especially of women, since it delays marriage, alters attitudes about family size, and makes modern contraception more acceptable. Increases in income themselves are a cause, as well as a consequence, of reduced fertility: people who are less poor have good reasons for wanting fewer children (including less need for their labor and for support in old age). And research has confirmed that family planning programs also are important in bringing about slower population growth.

Human development and poverty

Human development can thus assist growth. But the Report gives special emphasis to its potential contribution to reducing absolute poverty.

Growth and poverty reduction. Growth is vital to reducing all aspects of absolute poverty—malnutrition, ill health, and illiteracy, as well as low incomes—especially in the poorest countries (see Chart 2). But growth unaccompanied by other measures may neither boost the incomes of the poor much, nor lead to much progress in combating nonincome aspects of poverty. On both counts, human development programs have a part to play.

Chart 2National incomes and national poverty

1 Absolute income poverty line is the income of 45th percentile in India.

2 Refers to year specified in each section of figure, expressed in the prices of that year.

Raising the incomes of the poor. The Report discusses a wide range of policies, many of which positively reinforce growth, that can help raise the incomes of the poor. Support of agriculture, land and tenure reform, policies to raise the demand for labor, and various kinds of research are four important areas considered. Human development is an essential complement. It accelerates the spread of new techniques to small farms and increases the opportunities of the poor for employment in the modern sector. And because fertility and family size are reduced, the earnings of adults do not have to be spread so thinly among children and other dependents.

Nonincome aspects of poverty. The worst aspects of absolute poverty not only include low incomes, but also malnutrition, high child death rates, disease, and ignorance. All can be helped by human development programs. Less obviously, there is a complex interdependence between the different facets of human development — as there is between human development and increases in income. Changes in health, nutrition, education, and fertility all affect each other. Most striking, partly because least expected, are the powerful effects that education, especially female education, has on fertility, child health, and nutrition. As this suggests, human development is a circular process, one that can be vicious or virtuous, according to circumstances and policies. And it has its own momentum: what is done (or not done) today powerfully influences what can be done a decade or more ahead (see Chart 3).

Chart 3Literacy rates, selected developing countries, 1950 and 19701

(In per cent)

1 The rates are for the 20-24 age groups and were determined by date availability. Dates are close to 1960 and 1970.

Practical aspects of human development. Human development is easier to advocate than to accomplish. But much has been learned about the comparative efficacy of different policies and programs. In nutrition, for example, there is growing agreement that the central issue is not improving the balance between calories and protein but increasing the amount of staple foods the poor can afford. This involves raising their incomes, stimulating production of these foods and, in some cases, instituting special subsidies for the poor. In health, the vital role of primary care, together with schooling and control of mass diseases, is now generally acknowledged. In reducing fertility there is a better understanding both of how to implement family planning programs and of how such programs interact with socioeconomic and cultural conditions. In education more importance is now attached to its behavioral effects; and in raising educational standards, the significance of class size has been shown to be much less, and that of teaching materials much more, than was formerly believed.

Hard experience has also shown the difficulties of implementing human development and how to tackle them. Political obstacles such as urban bias and the weak position of the poor in the competition for resources often have to be overcome; but efforts to improve basic education, nutrition, and health have a universal political appeal. Although the financial constraint on programs often appears binding, there are frequently unexploited ways of cutting costs and harnessing additional resources. Human development programs can also encounter serious administrative constraints; here it is important not only to improve administration but also to choose the most manageable combination of programs and to encourage local participation. More paradoxical, but equally vexing, is the gap between need and demand that can sometimes lead to underused schools and clinics or the underrepresentation of girls and women in human development programs. Experience suggests ways in which this gap can be narrowed, and in some cases bridged.

Trade-offs and choices. Planners have to choose at the margin between human development and other activities, and between different human development activities. The choices are not easy, nor should they be the same in all countries.

The economic payoff to human development eases the trade-offs between growth and poverty reduction. But it does not eliminate them, which means that policy decisions will still be affected by the relative emphasis attached to increasing growth, raising the incomes of the poor, and attacking the nonincome aspects of poverty. And whatever the balance of objectives, the difficulty of quantifying costs and benefits often compounds the problems of deciding how large the human development budget should be, and how it should be divided among education, health, nutrition, and family planning, as well as within each of these areas.

The way in which these dilemmas are resolved must vary according to the circumstances of each country. Political and social priorities are important. So are income levels and growth prospects, and past progress in human development. In considering human development and other steps to reduce poverty, low-income countries, for example, must perforce put strong emphasis on economic returns.

The Report provides a brief discussion of human development problems and priorities in each of the major regions of the developing world. But it gives particular attention to the two regions in which absolute poverty is most serious: sub-Saharan Africa, which not only has the worst growth prospects of all developing regions but also the lowest levels of literacy and life expectancy; and South Asia, which contains half the world’s poor.

Nothing can make widespread absolute poverty melt away overnight. And human development at best can do only part of the job. Without effective policies on other fronts, and without active and enlightened support from the rest of the world, progress will be agonizingly slow. But these other policies will not be sufficient. The most valuable resource any country has is its people, the means and the end of economic advance.

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