World Development Report 2000/2001: Attacking Poverty

September 12, 2000, Washington, D.C.

PROCEEDINGS

MR. HAY: Very good morning, everyone, and welcome to our launch this morning of the World Development Report 2000-2001, which is entitled "Attacking Poverty." The World Development report is an annual report the World Bank puts out looking at innovative trends in development thinking, and faithfully in that tradition we launch this one this morning on the theme of poverty.

A quick reminder. The embargo is for 2:00 p.m. Eastern this afternoon.

Let's begin with a few quick introductions up here. On my immediate left is Nick Stern, our new-ish Chief Economist, having come to us several months ago, and on his left is Nora Lustig, the Director of the World Development Report team.

I'm Phil Hay from Media Relations, and so without any further ado, let me ask Nick Stern to start us off with why the World Bank has written this report.

MR. STERN: Thank you very much, Phil. Let me add my welcome to those of Phil. Some of you I know; most of you I'm sure I'll get to know over the coming years.

This is the first WDR that I've been involved with directly, and I'm very proud to be associated with this one, although, as you know, my direct involvement came just this year.

Now, why have we done a WDR on poverty now? Well, the first is that the World Bank's mission is about poverty. It's the commitment that brings all of us to work on development, and it is central to our work. So that is the first reason why it's about poverty.

Secondly is the magnitude of the challenge. As we describe in the report, 1.2 billion people live on less than $1 a day. That's extreme poverty by anybody's standards. And virtually half the population in the developing world live on less than $2 a day. Those are circumstances which surely we have to describe as poverty. That is what the report is directed to, understanding it and trying to understand in particular how we can overcome poverty.

But why particularly now? Well, the world and ideas and opportunities have been transformed over the last ten years. The world's changed dramatically. We've seen the collapse of the former Soviet systems. We've seen enormous expansion of foreign direct investment, capital flows more generally. Trade has grown much faster than incomes. We've seen communications move very fast. All the things that you think about in globalization, and more, we've had much improved policymaking in developing countries. And those changes, in trade, in technology, in policy, have come to produce what we think of here as a real opportunity to make great inroads into development.

But it's not just the circumstances that are changed. Our understanding has changed, too. The meaning of poverty, I think, is much better understood over the last decade or so than it was before. Why? Well, partly it's experience, but also it's associated with a much closer attention to the voices of the poor themselves. And the "Voices of the Poor," a document which I know that many of you have seen, has been fundamental to the thinking in this particular report.

So it's a deeper understanding of the meaning of poverty. It comes through very powerfully in the ideas in the report which run right through opportunity, empowerment, and security. And that is the language essentially that we have heard from poor people themselves describing their problems. So it's a multidimensional, deeper view of poverty than I think was there before.

Finally, a third reason why this is an important moment to reconsider and have another look is that the international institutions have changed. Certainly the World Bank has changed. It, I think, has deepened still further over the last decade its commitment to fighting poverty. It's shifted the structure of what it does. The balance has shifted towards health and education, for example, and it's changed the way it does things. And participation of people in the design and functioning of projects and programs, the whole ownership idea, is much more deeply embedded in the Bank's work than before.

So the world has changed. The ideas have changed. The institutions have changed, particularly the Bank. So it's very important that we think carefully about the meaning of that which we're trying to overcome and the methods for overcoming poverty. So that's why now and why I believe this to be such an important document.

So that is an understanding of why we're doing it now. But let me just take a moment to explain to you why I think this is such an important moment. We're seeing growth in developing countries now at a pace which we've not seen for some decades. There's every reason--associated with the facts as I described in terms of globalization and policy, there's every reason to believe that that growth will continue and that it will spread to areas where it's not yet been strong.

That gives us a real opportunity to make inroads into poverty in a way we've not been able to do as successfully as we would wish in the past. I think historians looking back would not forgive us as a world, as international institutions, if we did not rise to that challenge and take that opportunity. It's an opportunity for developed countries, too, where pressures on their budgets are perhaps not as severe as they have been or have been perceived to be in the past. It's time for them to be more generous than they have been. It's a time for them to embark and grasp those nettles which they see as being difficult in terms of trade relations and so on. It's that easier times are the moments when you can make those changes, both in terms of flows of aid, in terms of taking down barriers and so on.

So it's an opportunity for growth in the developing countries. It's also an opportunity for developed countries. And that's why I think that this report is so timely.

The ideas there--opportunity, empowerment, security--are ideas which are already being embodied in the Bank's work. That's as you would expect. The ideas build on the understanding which we've had over time. The ideas have been circulating and discussed over the years of preparation of this project. So you're seeing opportunity in terms of the work we do in promoting growth through good governance and so on. Through infrastructure, through education, the Bank has been building its contribution in opportunity.

The same with empowerment. Country ownership is much stronger now in the way we think of things. Participation of people in the whole area of public service delivery is much stronger than it had been in the past, in the way in which schools work, in the way in which legal systems work, and in the way in which electricity and water are supplied, and so on. So, again, these ideas are already there.

And, lastly, on security, a whole range of projects and areas where we work are devoted directly to security, from the international level with international financial architecture right down to irrigation and food-for-work programs.

So these ideas are in our work. But what we get from this report, I think, is a conceptual framework which is going to fundamentally alter the way in which people think about the concepts of poverty. I think you'll see these notions, these three pillars of opportunity, empowerment, and security running through the way in which people discuss these issues.

SO let me stop there and turn to Nora Lustig, the Director of the WDR for this year, to take you through some of the key ideas and examples and so on that are in there. Nora, thank you.

MS. LUSTIG: Thank you, Nick.

Good morning. It's a pleasure to be here and to have an opportunity to share the messages, the main messages of our report.

As Nick Stern said, poverty remains a problem of huge proportions today. We have a world in which a fifth of the population, about 1.2 billion, live on less than $1 a day, and about half live on less than $2 a day.

But, more importantly, what we've seen is that progress has been relatively slow in terms of reducing income poverty and also in terms of reducing infant and maternal mortality rates; particularly, we want to reach the commitments that were set in international development goals by the year 2015, which were ratified last week in the Millennium Summit.

In addition to these dimensions, poor people throughout the world have little access to the mechanisms, to the decisions that affect their lives, and are exposed to extreme vulnerability in the areas of in things like natural disasters, disease, personal violence, and economic crises.

At the same time that we recognize that poverty is a huge problem, we think that major reductions in poverty are indeed possible, particularly if we work on the three fronts that Nick Stern mentioned.

This report proposes a framework based on actions that have to take place in three main areas: opportunity, empowerment, and security.

What do we mean by them? By opportunity, we mean--what we know already--that it is important to implement policies to promote economic growth. It's through growth that the jobs that people need to have access to incomes are created, the markets for the goods, and it is also through growth that skills are expanded.

However, what we've seen in this analysis is that actually growth may not be enough. But in order to increase poor people's share of this growth, we're going to have to address inequalities. I would propose a number of ways in which these inequalities can be addressed, and particularly by making markets work better for poor people and by building up their assets.

I'm going to show you now how economic growth is associated with reductions in poverty using this graph. Here you can see very vividly how when countries grow--this, by the way, is a collection of information from 150 countries, and when countries grow, poverty is reduced, as we see in the southwest quadrant. And when growth lags, poverty increases.

There are two examples in the world today that show how this is very true. In China, for example, in the 1990s, growth resulted in a reduction by about one-third of the number of people living on less than $1 a day. In contrast, in Russia, during the economic crisis of 1998, poverty, the incidence of poverty, the proportion of people living in poverty increased by 50 percent.

However, as I said, growth can deliver very different outcomes depending on initial inequalities and how distribution of income evolves over time. In this graph, we see, for example, how in countries with low inequality, for the same rate of growth, the pace of poverty reduction can be twice as high than in countries with high inequality.

How can we address these inequalities? One important thing is making markets work better for poor people. And what do we mean by that? We mean, for example, removing all the barriers that state intervention create in terms of obstacles for local entrepreneurship to develop, particularly for small and micro enterprises.

We have an example in the report that in the case of Zimbabwe, when reforms were implemented for the Cotton Marketing Board, prices for cotton were increased because this board kept them artificially low, and that raised the incomes of all the farmers, all the cotton farmers, including the very small and very poor.

On the other hand, we also know that removing the intervention of the state may not always create adequate markets, and we have counter-examples also from Africa, like, for instance, in Zambia, where liberalization and privatization actually left farmers with more erratic access to credit and markets. So if the institutions that have to be there to replace state intervention are not present, we're not going to have markets working better for poor people.

Other areas that we emphasize in the report in terms of making markets work better for poor people are deregulation for the small. Deregulation has been implemented in many countries, but more sort of at the global level, and a lot of the things that affect poor small entrepreneurs are still barriers for their activities. Simplifying licensing requirements and tax systems are examples of this.

The other thing that is very important for poor and smaller producers is access to credit. Some countries, for example, like the case of the Philippines, have reduced the capital requirements for thrifts, small thrifts and rural banks, making credit more accessible and encouraging financial deepening in the rural areas.

And, finally, we think that expanding access to markets, now we can use actually information, information technology, to expand access to markets from remote areas to world markets, and we have examples of this. For example, the case of the Virtual Souk, which is an Internet marketplace that was set up for countries in the Middle East, that has given access to poor artisans living in remote areas to world markets. The sales of these artisans have increased by tenfold since this was installed, and the margins of the proceeds have increased by quite a large amount.

We also mean by expanding--by addressing inequalities, expanding poor people's assets. For this we can use public spending as an instrument that can be very important in expanding poor people's assets. There are innovative ways in which this is being done now; for example, in the case of Mexico, there is a program that now transfers money to poor families for them to keep their children in school and take their children to the health clinics on regular visits. And preliminary results have shown that these forms of interventions have actually increased school attendance and reduced school dropouts and also improved health outcomes.

We also think that, for example, having ways of reforming--having implementing policies of land reform, particularly the new forms of negotiated land reforms, are ways of expanding the assets of poor people.

How important is it to have more equal--to avoid increases in inequality with growth is shown also by the example of Bangladesh in the 1990s, when because the growth rate was accompanied by a substantial increase in inequality, the poverty levels at the end were 10 percentage points higher than they could have been without this increase in inequality.

In addition, an important finding that has been presented throughout the research one in the 1990s is that addressing inequality is not only good to increase poor people's share, but is also good for growth. Addressing asset inequalities, in particular, can result in better growth outcomes. So growth is good for the poor, but also reducing poverty can be good for growth.

By empowerment, which is the other area of action that we propose as an element of our poverty reduction strategy, we mean making institutions work better for poor people. We want to have public actions more focused on social priorities, and participation of the communities in, for example, the uses of the budget, the allocation of priorities in the budget can be very important. An example is the case of Porto Alegre in Brazil where local participation in the design of the budget throughout the years has resulted in better outcomes in terms of the local development.

We also think it's very important to make the legal systems that promote legal equity by changing, for example, the inheritance laws vis-a-vis women, and also making them more accessible to poor people. Supporting legal aid organizations in this case can be very important to make the law accessible and to defend poor people's rights.

Curbing corruption and bureaucratic harassment is also important for poor people in terms of improving the well-being per se and also allowing them to have better access to the resources that are supposed to benefit them. Here, for example, the media can play an important role. There has been the case that we discuss in the report; in Uganda, since announcements of the amount of money transferred to schools are published in newspapers and the radio, the diversion of resources has been reduced dramatically. Before, schools used to get about 20 percent of the non-wage resources, and after this process of disseminating the information, it reached almost 100 percent.

Decentralizing with broad participation of the local communities is also essential to making state institutions more--deliver better outcomes for poor people. But by empowerment, we also mean reducing the social barriers that keep, for example, women, ethnic, racial, and religious groups in situations of disadvantage in terms of having access to opportunities. And it's also important to build a social capital that helps poor people protect themselves and also defend their rights.

We have several examples. Making joint access of land to couples mandatory by giving women access to the asset, i.e., land, can be very important, and this is being implemented more and more throughout Latin America. Subsidizing girls' education can help bring women more--participate more in the education system.

Another example we have in the report is that implementing affirmative action and improving access to education to socially disadvantaged groups, such as the lower castes in India, have resulted in better outcomes for them. And supporting membership-based organizations--which are not intermediary, but membership-based organizations--can be crucial, for example, organizations such as the Self-Employed Women's Association in India, which has brought tremendous benefits for the more than 40,000 people that form part of it.

The third pillar under which we want to have actions included to address poverty is security. We all know that currently the world is hit by economic shocks, natural disasters, epidemics, and people are also affected by things as ill health, disability, unemployment, poor harvest. Preventing these shocks can be an important contribution to poverty reduction, an enormous contribution to poverty reduction. And also protecting poor people when they occur and helping them manage risk more generally can improve their welfare by reducing their experience of vulnerability and also letting them seize higher opportunities in the marketplace.

Let me give you one example. We know that economic crises have recurrently occurred throughout the world and that they cause transitory poverty to increase quite dramatically. But also economic crises not only result in raising--in rises, in increases in transitory poverty, but also can lock people in longer-term poverty because during crises children are pulled out of school or they become more malnourished, something that we've found evidence for.

Thus, to have a response to crisis which protects poor people from the brunt of the crisis can be very important. Despite this, most countries do not have the instruments in place. In fact, we saw during the Asian crisis that an economy which is as advanced as the Korean economy did not have the instruments to respond to the social costs of the crisis. So what we recommend is that it's very important, when setting up a crisis response, that there is protection of the spending items that benefit poor people and that you have safety nets in place, safety nets that can vary from country to country and from need to need. It can be in the form of cash transfers, public works when you have unemployment soaring, or stay-in-school programs if you want to prevent children from being pulled out of school. But they have to be in place on a permanent basis and deployed when situations of crisis occur, and that you have to ensure the financing if you really want them to perform what we need them to perform.

Well, to end, to sum up, our report, the report that we are presenting here, emphasizes the fact that if we really want to achieve the goals that have been set up by the international community, if we want to curb the growing gap between rich and poor nations, which has doubled in the last 40 years, we're going to need to have actions at the global level, not just at the national level.

The report discusses a number of these actions, but this list is not exhaustive. It's very important to expand market access for developing country goods and services in the richer countries. By some estimates, poorer countries, developing countries, have a welfare loss of about $20 billion a year resulting from this protectionism in rich countries.

It's very important to have mechanisms that reduce the likelihood of economic crises by defining rules that create more stability. It is also very important to have financing of global public goods such as medical research that benefits poorer countries and agricultural research that can benefit poorer countries and make the results of this research accessible to the poorer countries, for example, by developing vaccines for diseases such as AIDS, malaria, and tuberculosis, and by developing ways in which you can raise the yields of tropical agriculture.

It is also important to increase aid and debt relief, but focus it on poverty reduction, target it on poverty reduction initiatives, make it more sort of related to countries that develop credible poverty reduction strategies, and implement them forcefully.

And in order for the global trends to be more responsive and accountable to poor people, we need to have more participation of poor countries in global fora and also more participation of the organizations that directly represent poor people in global fora.

This report, to end, should not be seen as a handbook or a manual. It is designed to push a frontier about the way we think about poverty and ways to reduce it. It is not also a report that is a message from the World Bank to the rest of the world. The report was produced, was prepared with a lot of participation from academics and analysts, policymakers, civil society organizations, religious groups, and as Nick Stern mentioned, a lot of consultation with poor people themselves.

The priorities will also have to be set in local--by the countries themselves and by local communities. But we think that the strategy will have to be based on the three pillars, on the three actions, on the three areas that we mentioned from the beginning of opportunity, empowerment, and security. For poor people, higher consumption levels, broader set of skills, leading a healthier life is key, but so is being treated with more dignity and respect, being listened to and taken into account, and so is being more certain that when calamities occur, help will be there.

Thank you very much.

MR. HAY: Okay, Nora. Thanks very much indeed.

Let's take some questions. If you'll wait for the microphones in the aisleways, and then if you'll also identify yourselves and your organizations for the benefit of the transcriber, I'd be very happy indeed.

Let's go to the gentleman in the white shirt in the middle there.

QUESTION: Damian Milverton from Dow Jones. Two questions, the first being: In the press release that accompanies the report, Nick, you say that you hope the report will lead to new areas of action and new policies. Is that in addition to what you've outlined there in terms of the various global actions under the three pillars that you've got?

And, secondly--and this may be a kind of facile summation or reading into some of the figures, but it would appear that command economies or communist countries have actually fared perhaps a little better during the last couple of years than those that have made the transition to or are trying to make the transition to democracy or greater political freedom. Is it a case that you can't (?) political freedom because in some of the areas you've pointed to, a 20-fold increase in poverty in countries that are moving to a greater amount of political freedom?

MR. STERN: Thanks very much. The new areas of action, as I described, we're already embarked, I think, on a different way of doing development where the participation is emphasized much more strongly. And that is not only an end in itself, people that are involved in shaping their own circumstances, whether it be through schools or legal structures or land reform or whatever, it also produces much stronger material outcomes over time. So we're already embarked in the kind of direction which you're describing and that will intensify.

I think you will find, if you look ahead in the way in which the World Bank does its business, the kind of instruments it fashions, you will indeed see over time, over the next year or so and over a longer term, these ideas being reflected in what the World Bank does.

The whole question of simplifying conditionality, for example, which is very strong now, is all about making ownership more effective. So it really does embody the ideas that are here. But you'll see that across a whole range of things, right down to the project level, up to the kind of conditionalities that we require. And as Nora said, it's about the way we do things, but we hope it also offers some guidance for other people about how they do their things.

Now, on the command economies, the improvement in China that we've seen over the last 20 years since the reforms started in 1979 have precisely been about the dismantling of the command economies. The Household Responsibility System, '79 to '83 in China, was all about handing the responsibility for decisions back to households and away from the communes.

The whole growth of China since 1983 has been driven by the township and village enterprises which were enterprises which were very different from the state-owned enterprises and freed from the shackles of the command economy.

So those are examples--in Vietnam, we've been something similar. Those are examples where you see very powerfully the impact of incentives and the way in which leaving people to take economic decisions themselves gives an enormous kick to the whole development process. So they are not command economies anymore in the sense that we used to understand them--or in any sense, really.

MR. HAY: The gentleman here in the second row.

QUESTION: Jim Kasen (ph). I work for a newspaper that's published in Mexico called La Jornada. I have kind of a question about Latin America, and really it started by saying, well, why should people believe you? There's this whole controversy about the World Bank now. Alan Greenspan talks about people losing faith in the international financial institutions. Your own report on page--I think it's 23, suggests that both the number of the people and the percentage of people living in absolute poverty in Latin America has increased in the last ten years. Well, the World Bank's been around, as you say, addressing poverty issues for much longer than that. Is it fair to say and is the World Bank saying today that you accept some of the responsibility for failing to address these issues?

And I guess I'd like to hear a little bit--you've talked about what you're doing in the future, but what are you changing? What were you doing before that you've decided didn't work, that now you're going to do something new that people would have faith in this kind of project?

MR. STERN: In the first case, you have to look at the arguments themselves. Do you think they're logically consistent? Do you think the evidence is persuasive? And not just say, well, you're you. You have to treat it on a serious intellectual footing and say: Are these arguments serious? Is the evidence strong? And I believe the arguments are serious and the evidence is strong.

Responsibility for the way in which things have moved over time, everyone who's been involved shares the responsibility, the World Bank along with everybody else. Allocating responsibility is not easy to do, and neither is it particularly productive. But it's shared.

The key thing is to learn the lessons. And I believe that if you look at the way in which lessons are described in the report, they are learned, and learned clearly. But even more important, if you look at what policies have been adopted over the last ten years or so in the developing world, including Latin America, you're seeing an enormous increase in the quality of policy. And that is paying off, and it will pay off.

Now, how long does it take? It can take a long time, because institutional reform, for example, which is fundamental to the kinds of things that we're describing here, does take time. But I do believe that Latin America is embarked on a much more productive path now than was the case some decades ago. And I think that if the policies are followed seriously, if the ideas which we offer here form part of the discussion and intellectual framework, then I think there's real hope.

Nora comes from that part of the world, and I should ask her also to comment.

MS. LUSTIG: Yes, thank you. I want to bring the response back focusing on the report. If you go to the chapter that discusses making markets work better for poor people, you will see that we do acknowledge problems that have arisen by failed reforms. And I think in our part of the world, particularly in the country that you are writing for, Mexico, there is one example that vividly illustrates that, which is what happened with the process of financial liberalization in the early 1990s and how that may have been at the root of the latter banking crisis and financial crisis that the country faced in '95. And as we know, the drastic reduction in income resulted in a sharp increase in poverty.

So, yes, I think we learned from that experience that without adequate prudential regulation, maybe you can't grow fast in deregulating the financial system because you may face severe problems in the future. And, more broadly, the report also considers that if you don't have--if the political economy alignment leads to a state capture by elites of the process of reforms, which has happened in other parts of the world, particularly in the former Soviet Union, you can also have failed reforms.

On the other hand, I think that nobody can be naive in the case of Latin America. First of all, sort of the policies that were pursued in the past, in particularly the 1970s, of unsound macro policy and fostering very sort of uncompetitive markets by many barriers to entry did not lead to good things as well. I mean, the debt crisis came; the debt crisis in the 1980s resulted from bad policies that were implemented in the past. Now, with the changes particularly in the area of fiscal policy, with most of the countries following fiscal policy that is much more prudent, we have seen, for example, that inflation rates in a region where it was endemic has fallen, and in some countries this fall has been pretty sustainable. And that has an important implication for the poor, because inflation can be the sort of--is the thief of the poor.

Likewise, results of research show that even though in terms of growth you cannot say that Latin America is now doing brilliantly, without the reforms probably it would have done worse. So we always have to think about what would have been the alternative had not the reforms occurred.

MR. HAY: Okay. Let's get the gentleman there, Chris, just in front of you, and then we'll come back here.

QUESTION: Barry Wood, Voice of America. Mr. Stern, why has reform failed so--I'll start again. Why has reform failed so significantly in Russia--that's the first question--because the Bank has been involved in Russia, as it's been involved in China. One's a success, one's a relative failure.

The second question: Why has the transition to markets and the reduction of poverty and the establishment of a successful economy been so relatively slow, slower than expected in Eastern Europe?

MR. STERN: The failures in Russia over the last decade were clearly very real and the consequences dramatic for much of the population. But you've got to remember that the position which Russia and China started was very different. Russia had seen the collapse of administration, the collapse of an economic system which was very tightly bound in from one part of the Comicon to another, and China had a strong administrative structure and a regional structure which was much less interdependent. So that what happened in China when you started to liberalize is you got a lot of the gains from trade, of regions opening up and trading with each other; whereas, in Russia, you got a collapse of an economic system which was artificial and overly bound together.

There are all sorts of other ways in which the initial conditions were different. But at the same time, in the early stages of the Russian reforms, I think you found mistakes which were made in terms of the way in which, for example, privatization took place, which in retrospect were an important part of the problem.

Now, that's with the benefit of hindsight. At the time those reform were made, there was a real worry, a concern amongst reformers of the re-emergence of, re-election of a communist government, the whole reforms to be put into reverse.

So it's very easy to ignore the initial conditions. It's very easy to ignore the political circumstances at the time and point fingers. That we can do with hindsight. That's not my concern. But it is my concern and the concern of all of us who study the process of reform to understand what it was that went wrong to learn the lessons. And there it seems to me the importance of building sound financial institutions, legal institutions, the importance of building, if you like, social capital or going in directions which retain social capital, those things are fundamental, and those area ideas which are dead center in the World Development Report.

If you look elsewhere in Eastern Europe, I think--and the former Soviet Union, you see much stronger results. Poland and Hungary, I think, in retrospect will have been seen to have done pretty well. In Poland, the period of decline was just two or three years, and then have had pretty strong growth since then.

So there are some success stories. It's been tough for everybody, but there are some success stories. And if you look at the ideas that are there in the WDR, I think it may help cast some light on why some things work and why some things don't.

QUESTION: Alan Beattie [ph] from the Financial Times. I'm sure for many people, the publication of today's report will be overshadowed by the resignation earlier this year of Ravi Kanbur, its first author. A couple of people have -- a couple of NGOs have said that this final -- they were quite pleased with this final report which seemed to reflect the very earliest version rather than the interim version, which I understand Mr. Kanbur resigned around the time of.

Can you say if you think that's true? And if it's true, why it's true? And can you say in retrospect, do you think there was any need for Mr. Kanbur to resign?

MR. STERN: It's not true and there wasn't any need for him to resign. If you look at the earlier version which went on the Web in January, the ideas of opportunity, empowerment, and security were actually dead center. They were the ideas that drove that earlier version. They're the ideas that drove this version.

Now Ravi is a fine economist and a very decent guy, and he actually was a student of mine in Oxford in the 1970s. Why did he resign? In May, he had led a revision of the report based on all the interactions. If you ask for people's comments, you get them, and the team got lots of comments. It was a very good, productive, interactive process. And during the period from January to May there were changes that were made, and Ravi was involved directly in those changes. And we had an outline in May which was essentially the outline of this report.

So there's no interim version that's radically different from this one. The major changes that were made were made after the consultation period. That's what consultation is for, to help you edit and revise. And they were made, the major changes in May and June, and then the last couple of months were, obviously, polishing and tidying up. That's what you do in the last couple of months of a report.

So that was the process. So I'm pleased that they're comfortable with it now. We did indeed talk to a lot of NGOs in that process.

Now Ravi in May saw the changes that had been made as the beginning of a number of other changes that have been made. So he made a forecast. And economists like to talk of first differences. He took the first difference between January and May and he forecast from that that there would be further changes, basic changes, that would be necessary, and he didn't feel that he could make further changes from where he had gone.

So he forecast that there were further changes required of the team, or that they would be under pressure to make further changes. That forecast turned out to be wrong. Now economists make forecasts that turn out to be wrong all the time, and we have to make decisions on that basis. But I think in retrospect it was a wrong forecast, and therefore, I think there was no need for him to resign.

I've said that to him. I still have beers with him. He's not only a student of mine. He's a friend of mine. But I think he made a mistake.

QUESTION: Dolia Sevits [ph] El Financiero from Mexico. I wanted to address very concretely the case of Mexico because we have had, I think it was last month that CEPAL came out with their report on poverty and they concluded that poverty in Mexico had been reduced in the past years. And in your report you said that it fell in the beginning of the '90s but it rose in the poorest southeast later on.

So I wanted to know if you -- what's your assessment of the CEPAL report? If you agree with the evaluation that the poverty in Mexico had reduced, or are they using different statistics from the Mexican government that you were not able to have access to?

MS. LUSTIG: Yes, Dolia. I think that, first of all, when we produce a report the latest information, which is the one that you're referring to published by CEPAL was not available.

But in terms of the trends in Mexico, throughout the 1990s I think we can say there are three episodes. In the early 1990s there was some growth in Mexico, and as we saw when there is some growth we're supposed to be expecting some reduction in poverty, and that was the case. It was not a very large reduction in poverty.

But one thing that we stress in the report, not only for the case of Mexico but that happens in many countries, is that looking at aggregate figures can give you a sort of partial picture. Because even though aggregate figures may show that poverty is reduced, you may have different patterns of the evolution of poverty within a country. And it's true that in Mexico in that period poverty declined in the areas that were participating heavily of growth, but in other areas, in the more backward and poorest states in Mexico, poverty actually increased.

Now these disparate trends of comparing rural and urban poverty are found in many, many countries of the world.

Next, you had the crisis in '95. Again, as we saw at the beginning, when you have a growth collapse, you should expect poverty to increase, which is what we found. And those figures are reported in the document.

Finally, like I said, I haven't worked on the data that came after '95, but growth has resumed and Mexico has been growing actually quite healthily since '96, and you would expect poverty to decline. Therefore, the results that CEPAL produced are not surprising, that between '96 and '98 poverty declined in Mexico.[Whereupon, the hearing in the above-entitled matter concluded.

QUESTION: Sergio Cirica [ph] with Argentina. About the concept of empowering, where does the World Bank draw the line between this concept of empowering and the stability, the political stability concept in terms of how stability, political stability and social stability is good for growth?

For example, there is a box on Brazil and it mentions the land reform issue and the education reform issue. It doesn't mention the landless movement, for example, and it doesn't mention the teacher's union. And for example, mobilization in Ecuador by indigenous people was instrumental to a coup d'etat recently.

So which is the difference between real empowering, or positive empowering, and when things go messy and perhaps this concept could backfire?

MR. STERN: I'll let Nora handle some of the specifics of Latin America which she knows much better than I do. But on the notion of empowerment and political stability if I could just make one remark.

You should think of empowerment as about the whole way in which public services are delivered and people are involved in their immediate surroundings, particular in relation to public services, because that is what we can do most directly in terms of projects and programs. Think of empowerment in terms of country ownership, the way of think about conditionality and so on. So that's the kind of notion of empowerment in terms of policy for the World Bank and for some other agencies which we would stress.

Now there's another part of the story which is, as analysis of the processes of development and change one can ask questions about whether stability is good or bad for economic growth, which democracy has different -- more democratic systems have different kinds of effects on economic growth, and so on. And we have to be both those people. We have to be policy designers, and we have to be students of the development process. And you'll find both those things there.

But one shouldn't confuse the two things. One is direct analysis for the purpose of getting immediate policy, and one is understanding in the development process. So because one might say the democratic systems on the whole perform better from the point of view of economic growth, on the whole, that doesn't mean to say that this is an institution that's going to interfere in any direct sense, or indirectly, in democratic processes.

So it's important to make those distinctions: policy for projects and programs, which we do talk about and where the empowerment notion is focused; and analysis of students of development where we have a broader campus. But those are different kinds of activities.

MS. LUSTIG: More than commenting specifically on the cases, I think that one of the important messages of the report is that, first of all, we know that conflict is associated, particularly civil conflict when you get to the point of violence is associated with tremendous losses in welfare. So that implementing all the actions that actually can produce a likelihood of these situations is very important.

Before you get to situations in which the process of empowerment becomes disruptive you have to tackle, you have to address the causes of that. And that's why we put so much emphasis on tackling inequalities as part of the agenda for poverty reduction. Very often the disruptive empowerment occurs because people have been neglected, not listened to, not taken into account.

So if institutions of the state and institutions of society change in the direction of involving people in a constructive manner, the likelihood of these events will be reduced and that would be for the benefit of all, including poor people themselves.

QUESTION: Steve Perlstein from the Washington Post. Nick, I wonder if you'd go back to the question of the resignation. There were reports at the time that there was pressure from the U.S. Treasury, maybe from some of the European members of the Bank, that the first draft was insufficiently respectful of some of the orthodox beliefs of economics, which is that if you just get the liberalization right and the free trade right, everything else will flow from there. And this constant harping about institutions and government involvement only clouded the message.

Were those reports accurate? And if not, could you, in the interest of transparency, could you tell us what were the objections and how in the end you resolved them in your own mind, whether to say, we discarded them or whether you say incorporate them? Obviously, these are things that reasonable people differ on, so how did -- what were the objections? Where did they come from? And how did you resolve them?

MR. STERN: I'll say a word or two then hand over to Nora. The objections to the earlier report, I think it's better to think in terms of -- rather use that language -- what were the kinds of comments we got from all the people we talked to about the draft in January? Because many people commented, inside the Bank, outside the Bank, NGOs, shareholders, academics. And they all had the right to comment, and indeed, that's what we were asking for. So we received a whole range of comments and we tried to take them all seriously.

QUESTION: I'm particularly interested in the comments you received from the United States Government and the governments of Europe.

MR. STERN: But you have to see that -- the Bank -- I know you are from the Washington Post, so the Bank has many shareholders, and many academics we talked to in many countries.

Now we did receive comments from -- written comments, helpful written comments from the U.S. Treasury. We received them in the middle of May, shortly after a number of -- shortly after the basic revisions had been made. Now they had from January until the middle of May, but it turned out they were very good comments, so doubtless they took time preparing them.

But the major changes that were made were made ahead of those comments in relation to all the comments that we were receiving. And there was nothing -- given all the process of discussion that had been going on for about five months, there was nothing especially new, I think, in the comments that we received from them. There were ideas that we had got from many other sources in the past.

QUESTION: And what was the thrust of them?

MR. STERN: Now the thrust of the thrust of the comments that we see from many economists, and including from the U.S. Treasury, was that the emphasis on the opportunity side of the story was too low in the earlier versions.

That was also my view and the view that I expressed in January at a meeting of the American Economic Association way before I knew I was going to be chief economist at the Bank, because I was asked myself to comment as an academic from the London School of Economics on the earlier draft. So my own views that in the first case there was an under-emphasis on the opportunity side were on the record.

Now what we did is to take those ideas that were there and we've kept them right the way through. We've kept the ideas of opportunity, empowerment, and security, but we changed the order from January for two reasons. One was for emphasis, because I think the comments that the opportunity was under-emphasized were reasonable. Must be, because I made them myself, right?

[Laughter.]

MR. STERN: Now the second one -- and I think this is actually a little more important -- was exposition. If you're trying to persuade people and get people to come into new ideas -- which is what we're trying to do here. That's the point. The ideas of empowerment and security. The best way to do that is to lay the common platform first.

So the opportunity side, if you like, is that common platform. It's something which I hope we've contributed to, but was, I think, more or less standard in the literature. I hope we've deepened it. I think we have.

But it was getting the basic agreement on the table first and then taking people along to these broader ideas. And I think the reception we've got to these broader ideas has shown that that exposition or way of doing things has in fact been successful. So that's the story of the change and the change that took place.

Nora, is there anything you'd like to add to that?

MS. LUSTIG: No, I think that -- anyway, the comments that we received on the earlier draft -- which by the way is still on the Web so people can look at it and see what the first draft was -- as Nick said, came from lots of people.

Many, many academics and policymakers, not just the U.S. Treasury, were concerned by the impression that was given by the report that seemed to undermine the role of growth and opportunity, and that seemed to undermine the benefits of economic reforms. Policymakers that had a hard time implementing reforms in their own countries felt that this was going to do a disservice.

And actually, when we reread the report we saw that in the chapter in the discussion of reforms, perhaps the same evidence that exists now was given in a more negative light than the evidence warranted for. And that is it important, as I said in my earlier comment, to recognize what benefits reforms have brought, and also recognize when they fail and the fact that they generate losers. But that we have to acknowledge the benefits as well as the costs of reforms.

And as Nick said, because a lot of people had the impression that we were undermining opportunity and growth, then that was certainly not a message that we wanted to give, and therefore the change in sequence was considered to be one way to deal with this concern.

MR. STERN: But let me emphasize again that exposition and understanding are things which you have to treat empirically. If people misread, misunderstand on the basis of what you've written, that's something you get from the consultation process.

But at the end of the day, this report has the key ideas that were there before, and the institutional side, the governance side is extremely strong there. And there's nothing in this report that says simply get prices right, and privatize, and everything will work. That is not the message of the report and I think from the way we've set it out today that it's not.

QUESTION: Thank you. Al Hamilton, International Trade Finance Report. You mentioned the importance of having access to credit and the importance of having access to international markets. Is there a suggestion here that conceivably the Bank will increase its technical assistance in developing the specialized financial institutions that are necessary for exporters to have access to working capital, post-shipment financing, and the like? Thank you.

MR. STERN: That's something which we probably should keep for our friends at IFC. But if there's someone here who can comment on that, I'd be very grateful.

But in terms of the importance of this kind of activity, I think that is one of the messages of the report, that it is of significance. But the Bank's specific plans in that area I'm afraid I'm not acquainted with, and I'd hope that someone from the press office can follow up on that one for you.

MR. HAY: We'll find someone, Mr. Hamilton, after the session.

QUESTION: David Briscoe from Associated Press. I just wanted to make clear, you both mentioned the sequence change of order of these, empowerment, opportunity, and security. What was the previous order and sequence?

MS. LUSTIG: It was empowerment, security, and opportunity.

QUESTION: So merely by changing the order of them you figure that you have somehow assuaged the concerns of some critics?

MS. LUSTIG: Yes, actually when we produced the report that was right before the one that was published we again had more limited consultation on the results with some leading academics, NGOs, and yes, the impression that we were undermining growth was changed.

MR. STERN: And exposition is important, right?

QUESTION: Right. Just one follow-up question. As you noted, Mr. Stern, that there has been some favorable commentary on this report even before it came out from some of the NGOs. It seems to me though that they're sort of emphasizing things differently than you have emphasized them this morning.

OXPAN, for example, says, in what amounts to an open rejection of the campaign by the IMF and the U.S. Treasury to promote capital of account liberalization, the report acknowledges the case for capital controls in developed countries. Is that an accurate interpretation?

MR. STERN: The report is cautious about speed of liberalization of capital controls, and essentially makes the case that it's very important that the financial institutions in a country are strengthened at the same time as capital account is liberalized. I think if you talk to our colleagues at the IMF and in the Treasury you will find actually quite similar views.

QUESTION: Hi, it's Maria Leonard from La Nacion from Argentina. I'm kind of confused. Unfortunately, I can't remember the name of the report, but like a couple months ago the World Bank had a report about Latin America. Specifically what it said is that people were very much pessimistic and they saw themselves as being like worse than their parents were, like the previous generation, and that there was no grounds for that pessimism, and that poverty had not in fact grown in the last decade. But now this report says that it has grown.

So I would like to know whether -- what in fact what's the situation with poverty in the region and whether -- the reason there's not ground for that pessimism you seem to dismiss on the previous report?

MS. LUSTIG: Let me say what this report says. First of all, what this report says, using a dollar a day, the number of poor people has increased, but the share, the proportion of people leaving under a dollar a day has stayed more or less stable throughout the 1990s.

The second thing that this report emphasizes the fact that vulnerability to shocks, to adverse shocks, economic crises, natural disasters, ill health, produces a sense of ill-being in poor people. And I think that what we see in Latin America is that being exposed to different shocks -- it's a region that has been affected by economic crises, by natural disasters, by unemployment costs, by the process of structural change -- people feel that as a source of insecurity.

And in addition, I think that particularly Latin America the reforms, or the source of the reforms have been oversold. Maybe people expected to see results much more quickly than what we actually have seen, and part of this ill-being, this disillusionment has to do with expectations that have not been fulfilled.

MR. HAY: Okay, I think we'll leave it at that, ladies and gentlemen. If you want to come up and see us afterwards, happy to answer your questions. But thanks very much indeed for coming this morning. Just to remind you of the embargo at 2:00 p.m.

[Whereupon, at 11:13 a.m., the press conference was adjourned.]