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South Asia Update and Poverty Dynamics Conference 2007
Visions Theatre, National Museum of Australia, Canberra 27-28 September 2007 Opening Presentation by Praful Patel, World Bank Vice President for South Asia Ending Poverty in a Generation: The Challenge of Politics and Institutions Ladies and Gentlemen, Colleagues, and Friends: It is a pleasure to be here today with all of you. Not only will I have the privilege to hear and learn
from the important work you are doing on South Asia, I will finally have a chance to see a small cornerof Australia. This is my first visit to this wonderful continent. But, I am familiar with Australia. Indeed, its
experience with policy and institutional reforms is increasingly informing the policy debate in South
Asia. How Australia has reformed its Competitions Policy, its impact on utility reform, the way the
relations are managed between the Commonwealth, the States and local governments, and the ongoing discussions about the management of water resources – to name a few - are all influencing
important policy discussions in South Asia. Before I talk more about the value of your experience of institutional change, let me first share with
you my perspectives on South Asia. The first theme of my message today is one that we in the World Bank are very excited about. And that is the real prospect of eliminating poverty in South Asia • There is no doubt that these are extra-ordinary times for South Asia.
• Who would have thought that the finals of the World Cup 20-20 would be an exclusively South Asian affair? I hope you’ll forgive my emotional allegiances. As a Ugandan, I celebrated Zimbabwe’s feat. And as an African of South Asian descent, a Pakistan-India final was a dream contest.
• But the reality of South Asia off the cricket field is even more extraordinary.
• During the past decade, every country in South Asia has either been growing rapidly or reducing
poverty rapidly – or both. o India is currently registering 9 percent growth and lifting 10 million people a year out of
poverty. Long buried is Lal’s infamous “Hindu rate of growth” that depicted India as a slow
giant.
o Bangladesh, Pakistan, and Sri Lanka are growing at nearly 7 percent a year. And Bangladesh’s
rate of poverty reduction is twice that of India, putting to rest Henry Kissinger’s image of
Bangladesh as a “basket case”.
o Even Nepal, which has had anemic growth, managed to reduce poverty by 11 percentage
points in eight years.
• This raises the distinct possibility that South Asia – the region with the world’s largest
concentration of poor people – will not just reduce poverty, but it may eliminate it in a
generation. Knowing South Asia well, you may well be surprised by this assertion. • Success will require that South Asia’s growth be sustained and made more inclusive. This in turn
means closing the large infrastructure deficits and realizing much faster growth in lagging regions and
states. It will also require that human development be accelerated; and deep problems of governance
be overcome. • Can this be done? My answer is: “Yes. But it won’t be easy.” “Yes”, because South Asia is in the grips of a “growth momentum” that is changing the
dynamics of policy making.. “Not easy” because most of the key obstacles stem from a policy or institutional failure
whose reform is deeply political. And as you know, anything political is hard to reform. We
should remember that these policies and institutions were often introduced with the best of
intentions - and often to protect the poor. But in many cases, they have now become
obstacles rather than enablers.
My next theme is challenge of institutional and structural reforms that are urgently needed for South Asia to eliminate poverty. • Whether policy makers are able to resolve these challenges will make the difference between just
advancing poverty reduction and achieving the dream of a sub-continent free of poverty within a
generation. I see four key imperatives: the need plug the region’s huge infrastructure deficit; the
importance of ensuring growth benefits all; the central priority to invest in people; and the need for
the right governance environment. Allow me to say a few words on each of these. Infrastructure Deficit • South Asia faces formidable infrastructure deficits. Power outages and load shedding are common. Not a single city in South Asia is able to deliver drinking water 24 hours, seven days a week even though in most cases there is plenty of water available. Traffic congestion is bringing many a city in South Asia to a standstill. • Among the reasons for these deficits is the lack of investment in the past, under-spending on
operations and maintenance, weak regulation. I think there was also possibly an optimistic view – for
which donors must accept the lion’s share of the blame – that the private sector will “take care” of
infrastructure.
• But these are only proximate reasons for the deficits; at the heart of the problem is how
infrastructure is managed.
• For example, most utilities in South Asia are run directly by political leaders. The Chairperson of
Water Boards in India is, for example, in many cases, the Chief Ministers of the State. There is little
distance between the policy maker and service provider – judge and jury are one and the same. Under these conditions, political considerations, not service delivery objectives, drive the provision of
services.
• The pricing of infrastructure services reflects these political decisions. Prices of electricity and water have been kept deliberately low, so that poor people can afford them. But the outcome has been everything but: a decrepit electricity grid, intermittent service, and deficit-ridden utilities. The
Ceylon Electricity Board, for example, loses 50 million rupees every day. That’s the cost of one rural
hospital. Worse, poor people, the very ones for whom the prices were kept low, are usually left out of
the electricity or water networks. They end up buying it in the private market at about five to sixteen
times the meter rate. Various estimates suggest that India needs to invest about 8 percent of GDP in
mainly water and power infrastructure to sustain growth. Our calculations show that about half of this
investment can be financed by better pricing of infrastructure.
• This is no secret. So why haven’t South-Asian governments been more pro-active in changing how
infrastructure is managed? Simply put, this a deeply political act, not simply a question of applying
technocratic solutions.
• Subsidized electricity is a good example. There are winners and losers. The winners can mobilize
themselves to block the reform. One of the most distorting and inequitable policies is the practice in
some Indian states of giving free power to farmers. Yet when Chandra Babu Naidu, the chief minister
of Andhra Pradesh, reformed the policy, he lost the election. His opponent ran on the platform that, if
elected, he would restore free power, which he did. I have to admit that the World Bank has not
always helped. Given the enormous distortions and losses of the utilities, the Bank in the past took a
rather absolutist position, saying that we would not lend for infrastructure unless there was reform. As a result, there was neither reform nor infrastructure investment. Over time, we have realized that
this is not productive. In the past three years, we have been working with governments, using a mix of financial and knowledge assistance, to help them reform and crowd-in investments in infrastructure. For instance, we have been working with the new government in Andhra Pradesh in a series of policy
reform operations to rationalize the energy sector and improve public expenditure management.
While AP still has the “free-power” policy, it is much more finely targeted to small farmers; they have
introduced metering of all power users; and the state now has the best-run power sector in India. We
haven’t solved all of AP’s power problems. Much more investment and reform will be needed. But the
state appears to be on a virtuous cycle of policy and institutional reforms, more investment, higher
growth, more reforms, and so on. Inclusive Growth • Let me turn next to the problem of inclusive growth. Inequality is rising in South Asia partly because
certain well-intentioned policies have backfired, making it harder for poor people to benefit from
growth. In Sri Lanka, for example, agricultural policies have fueled inequality. Economic growth has
been concentrated in the Western Province. The rest of the country has not grown because
agriculture has hardly expanded, in large part due to policies that restrict farmers to growing
rice rather than allowing them to diversify their crops. Recently a farmer was fined 35,000
rupees for growing bananas on his land. But, even though the evidence is clear that changing
the rice policy would enhance growth and benefit the poor, political inertia makes this a
difficult shift. Another source of rising inequality in South Asia is the lack of unskilled employment growth.
In India, Pakistan and Sri Lanka especially, economic growth has not been accompanied by a
commensurate increase in employment. A major reason for this is the set of restrictive labor
regulations in most of these countries. The average severance pay in Sri Lanka is 175 weeks.
Not surprisingly, firms stay out of the formal sector so they can avoid these regulations. In Sri
Lanka, the number of employees per firm peaks at 14. Why? Because the employment
regulations kick in at 15 workers. But informal sector firms cannot invest in large-scale
equipment that will then give employment to significant numbers of workers. In short, due to
some restrictive employment regulations, low-skilled manufacturing employment has not
grown in South Asia. The solution is not to get rid of these restrictions, but to replace them
with regulations that provide workers with adequate security and employers with flexibility to
hire more workers. Needless to say, reforming labor laws can be political dynamite. The
challenge to us is “how can we help in this process?”
• On the subject of inclusion, I want to make one quick point. The Bank has shifted its strategy from one where we supported reforming states to one that emphasizes lagging states. In India, we are focusing on Bihar and Orissa (and possibly Uttar Pradesh), with development
policy operations; In Pakistan, we have programs in North West Frontier Province and Balochistan.
• The shift represents an increase in the riskiness of our investments. And the environment in these
lagging regions is more difficult to work in. But we are convinced that this is the right path.
Human Development
• Human development is lagging behind economic growth in most South Asian countries. One symptomof institutional failure is the high rates of absenteeism among teachers in public schools and doctors in primary health clinics. In India, the average rates are 25 and 40 percent respectively. Even when providers are present, the quality of services provided is appallingly low. As a result, 80 percent of health spending is in the private sector. Poor people bypass the free, public clinic and pay the private doctor (who may be a quack) because at least he is present and treats them well.
• The problem is the failure of service providers to be accountable either to policymakers or to their
clients. Public-school teachers are absent because no one is monitoring them; and they collect their
paycheck even if they don’t show up for work. Changing this situation is changing the politics of the
sector – again a task beyond the traditional technocratic solutions.
• So what can be done? One path is to change the incentives is to make schools and health care
providers more accountable for performance. In Bangladesh, they do this by giving students – in this case, female secondary school students– a choice. Girls can chose between public, private, NGO-run, or madrassa and the schools are compensated according to the number of girls they enroll. Not only is secondary school enrolment rising rapidly in Bangladesh – and twice as fast for girls as for boys – but many schools now have separate latrines for girls and boys. Schools are hiring female teachers to attract more girls to enroll there. A second way to make schools accountable is to have parents and the local community
participate in their management. Nepal has handed of the running of 5,000 public schools to management committees consisting of parents, teachers and respected members of the local
community. Teacher and student absenteeism is down, and the program is likely to cover all
schools in the country before long. A third form of strengthening accountability is to allow schools to hire teachers from the local
community, as is being done in Punjab, Pakistan. While they may be less qualified than the
public sector teachers, these people are more reliable in attendance. Also, some studies show that the quality of teaching is not significantly different from that by more qualified (and
more expensive) teachers from urban areas. Finally, contracting out health services increases accountability and appears to improve
outcomes. In Afghanistan, an independent evaluation of a program of contracting out health
services showed, among other things, that about 40,000 babies a year were saved from dying
before their first birthday, a tremendous turnaround in a country which had among the highest
infant mortality rates in the world
Governance • Let me turn to governance. There is no question that South Asia suffers from various problems of weak governance. One symptom is the high levels of corruption. • Bangladesh, for example, is at the bottom of the Transparency International index. Yet this same
country has seen its GDP growth rate increase by one percentage point every decade. Poverty has
fallen by about 1.8% per year for the last ten years. There are equal numbers of boys and girls in both primary and secondary school. And the country is on track to achieve the Millennium Development Goal in child mortality. • This “Bangladesh paradox” as we call it shows that we need to un-bundle governance into its
components and understand what works and what doesn’t. For instance Bangladesh has a thriving
civil society. The government has traditionally made room for NGOs to deliver basic services and the
microfinance revolution now reaches some 20 million households. Meanwhile, corruption has
contributed to the fact that Bangladesh has not been able to attract a single independent power
producer this decade – despite severe power shortages. And confrontational, sometimes violent
politics has clearly dampened the climate for investment.
• In addressing Bangladesh’s governance problems, we need to build on its strengths. The presence
of an active civil society has lead to the demand for bringing the state closer to communities – in other words, there is an organic demand for decentralizing one of the most centralized systems of
governance. The Bank with the support of the SDC, UNDP and the EU has stepped in to help strengthen the country’s local government system even as we support the funding of community organizations.
• Formation and strengthening of local governments is a political act; but done correctly, it can
have deep impact on development and poverty eradication. For that reason we have chosen to
engage in the policy dialogue on decentralization.
Conflict
• Finally, the persistent civil conflict in countries like Sri Lanka and Afghanistan undermines
development. And conflicts are perhaps the thorniest of the political problems to address.
• In places of conflict, the Bank’s approach is not to walk away from these situations. Rather, we
tailor our assistance to help reduce poverty within the context of the conflict. For instance, during the Maoist rebellion in Nepal, we continued to provide support to
community-run health clinics. In Afghanistan, we support the National Solidarity Program
which provides communities with funds to run schools, clinics and small infrastructure
projects. In Sri Lanka, we are going a step further and using our assistance to address the
causes and consequences of conflict. We have a program of housing to resettle internally
displaced persons. And we are introducing common-language programs in our education
projects to bring divided communities together.
• Equally important, in many of the conflict areas, we are investing in supporting the
stakeholders to look at the issues of the restructuring of the state, the role of local
governments, and the design of the interface between the state and communities. Again these are all political changes, but changes that will impact on the accountability of the state to
deliver development to its citizens.
The final theme of my presentation is to share some thoughts on possible solutions to some these
challenges and mention suggestions for the next generation of donor support and research focus. As I have said, policy and institutional changes will be necessary to address the key obstacles facing South Asia if eliminating poverty is a dream that can be realistically achieved within a generation. Strong growth will help, but it won’t be enough. This can only be done if we recognize that policy and institutional changes are a highly political affair. They emerge from complex policy reform processes. And as donors our understanding of
these processes is critical if we are to support the extra-ordinary changes that are happening in South Asia. None of this is easy, and we certainly don’t have all the answers – which is why I have chosen to focus on these issues today..
In this context, let me talk about our relationship with AusAid and priorities for donor and research focus. • In the past we have focused on supporting fiscal stability, getting macro prices corrected, opening
local economies up to global opportunities, funding bulk infrastructure, and investing in intelligent
interventions at the household level. Now we need to focus on institutional change to improve
accountability of the state to its citizens. This maybe the best way to have impact on poverty
reduction on a sustained basis and at scale. • For IDA to have the necessary impact on poverty reduction, we need to leverage and build on
reform processes that support institutional change.
• In recognition of this, AusAid and the World Bank have entered a partnership whereby an AusAid
trust fund is funding teams to engage in policy processes in all countries in South Asia with the
aim at supporting institutional change at the country level. In particular, the fund is focused on
understanding and strengthening the linkage between decentralization, local governance, and
service delivery in South Asia.
• This is one of the most important bilateral relationships the South Asia Region of the Bank has
with any one donor. The fund’s focus on institutional change and its regional coverage places it
at the cutting edge of the next generation of focus on development issues. It will significantly
leverage the use of IDA resources in South Asia.
Research Implications
• There are also important implications for the research community as we focus more on
institutional change. In particular we need to know more about: • In this context, I would go back to where I started: Australia’s reform process. To answer these
questions, we need to better understand the history of institutional change in countries such as
Australia. These are not questions that can be resolved from first principles, we need to know
what has worked and has not worked in different environments – and why. • Take for example the policy debate on the management of the Murray Darling Basin. It has been
viewed by South Asia as one of the most successful institutional systems of river basin
management. Indeed we recently brought a team from Pakistan to learn from this experience. Yet
in Australia, it is now facing a serious review. Understanding the history of Murray Darling and the
institutional changes in river basin management in Australia has a lot to offer regions such as
South Asia. • I look forward to your contribution as researchers to our understanding of institutional
change. Conclusion
• To conclude, I am optimistic that in South Asia we can end poverty in a generation. South Asia has
already shown that it can accelerate growth and reduce poverty. The remaining obstacles to
ending poverty – inequality, infrastructure, lagging human development, weak governance – are all
man-made. If we erected them, surely we can also dismantle them. • While removing these obstacles is deeply political, South Asia’s recent growth and some successful initiatives around the subcontinent are helping to build political support for reform. By providing knowledge and financial assistance to support reforms, by working with governments to overcome political obstacles rather than imposing strict conditionality, and by engaging with lagging states and countries in conflict, the World Bank’s recent strategy in South Asia, with support from
AusAid, is producing results. • As you enter the World Bank’s building in Washington, D.C., there is a sign that reads “Our dream
is a world free of poverty.” For the 1.4 billion South Asians, together we have a chance to help
make that dream a reality. • I look forward to a lively discussion. |
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