PRAGUE, September 25, 2000 - Countries can dramatically improve the quality of peoples' lives if they blend policies that promote economic growth with those that embrace wider access to education, greater protection of the environment, more civil liberties and stronger anti-corruption measures, according to The Quality of Growth, a World Bank report published today.

A striking feature of the report is new research that shows that countries could double their per capita incomes by improving the quality of their legal systems and combating corruption. An improvement in the rule of law from the levels observed in countries such as Ukraine or Indonesia, to the middle range corresponding to the Czech Republic or South Korea, could be associated with a doubling of per capita incomes over the medium term and a sharp improvement in the quality of people's lives.

The Quality of Growth - launched at the Annual Meetings of the World Bank in the Czech Republic- says that while the last decade of the 20th century saw great economic progress in parts of the world, it also witnessed stagnation and setbacks, even in countries that had previously achieved the fastest rates of economic growth.

These gaping differences and sharp reversals teach us much about what contributes to development. At the center is economic growth, not just its pace but- as important- its quality. Both the sources and the patterns of growth shape development outcomes.

World Bank President James D. Wolfensohn, in the report's foreword, remarks that a better quality of life for the poor calls for higher incomes, which requires sound economic policies and institutions conducive to sustained growth, Wolfensohn says "Achieving higher incomes and a better quality of life also calls for much more-improved and more equitable opportunities for education and jobs, better health and nutrition, a cleaner and more sustainable natural environment, an impartial judicial and legal system, greater civil and political liberties, trustworthy and transparent institutions, and freedom of access to a rich and diverse cultural life....... The volume makes a compelling case for focusing on these policy and institutional dimensions, and for doing so with country ownership and partnership among participants in the development process."

Mixed development record

Looking back over previous decades of development results, the report says that the world has much to celebrate as it begins the new millennium. A child born today in the developing world can expect to live 25 years longer, and be healthier, better-educated, and more productive than a child born 50 years ago. The spread of democracy has brought millions of people new freedoms and opportunities. The communications revolution holds the same promise of universal access to education.

However, upon closer examination, the report says that at least 100 million more people are living in poverty today than a decade ago, and the gap between rich and poor is growing wider. In many countries the scourge of AIDS has cruelly cut life expectancy-in some African countries by more than 10 years. Each year 2.4 million children die of waterborne diseases. As many as a billion people have entered the 21st century unable to read or write. Some 1.8 million people die every year of indoor air pollution in rural areas alone. Forests are being destroyed at the rate of an acre a second, with unimaginable loss of biodiversity.

"Just as the quality of people's diets, and not just the quantity of food they eat, influences their health and life expectancy, the way in which growth is generated and distributed has profound implications for people and their quality of life," says Vinod Thomas, World Bank Vice-President and lead author of the new report. "What factors are most effective in sustaining growth beyond a temporary upswing and in bringing about real gains in human well-being? Sound macroeconomic policies and the application of appropriate market-oriented microeconomic principles are basic elements. But along with them, several crucial factors- often neglected in policymaking and policy advice- emerge as key to improving peoples' lives."

What then is the quality of growth? Complementing the pace of growth, it refers to key aspects shaping the growth process. Country experiences bring out four crucial areas: improving access to education, protecting the environment, managing global risks, and improving the quality of governance - making institutions less corrupt, more transparent, and accountable to ordinary people. These not only contribute directly to development, they also add to the impact of growth. They address the conflicts that growth might pose to environmental or social sustainability. It is the mix of these policies and institutions shaping the growth process that signals its quality.

Improving access to education

In India, differences in levels of education (in addition to agricultural productivity) explain why the response of poverty rates to growth have varied widely across different states. How widely and fairly education is made available also matters. A new survey of 85 countries conducted for the report shows that Poland and the United States are the world's fairest educators in terms of providing equitable opportunities for schooling (fig. 1). In many countries, such as Afghanistan, Algeria, India, Mali, Pakistan and Tunisia, the inequality in education is staggering. These inequalities imply that vast numbers of people, often women or oppressed minorities, do not get the opportunity to improve their lives through education. Consequently, the loss to society is huge.

Figure 1 Distribution of Education in 85 Countries, 1990



Source: Thomas, Wang, and Fan 2000.

Note: Towards 1.0 indicates less equal distribution of education, towards 0.0 indicates more equal.

Focusing on quantity alone does not ensure quality. Public spending on education only slightly relates to actual educational results for a number of countries. In the area of health, the United States ranks highest in health expenditure per capita, yet ranked 37th in terms of the system's performance among 191 economies. France, which has about 60% of the US share of health expenditure in GNP, is ranked first in health system performance, Colombia is 22nd, Chile 33rd, Costa Rica 36th, and Cuba 39th. Colombia ranks first in the category of "fairness in financial contribution."

Protecting the environment

The quality of the environment, and the state of natural resources and biodiversity, have immediate impacts on the lives of the poor: pollution in cities, indoor air pollution from combustion of dirty fuels, the depletion and deterioration of water supplies, and increased risk associated with agricultural activities. Managing natural resources effectively contributes to long-term growth and improves welfare directly. In 1997, gross domestic savings were about 25 percent of gross domestic product in the developing world, but when corrected for the depletion of natural capital, the genuine domestic savings were only 14 percent of GDP. This includes the case of Nigeria with gross domestic savings of 22 percent but genuine savings of negative 12 percent, and that of the Russian Federation with 25 percent and negative 1.6 percent respectively.

Environmental degradation is rampant in both fast and slow growing economies, and much of its cost goes unaccounted for. Figure 2 shows a negative association between the growth rate and one index of change in environmental quality.

Figure 2 Environmental changes and growth of income



Source: Authors.

Note: towards 60 indicates better, towards 0 indicates worse

Indonesia's forest fires at the height of the East Asia crisis- caused by policies and poor forestry management- resulted in $4 billion in direct losses in 1997 and again in 1998, with extensive damage to neighboring countries. But this environmental disaster never commanded the same attention as the financial crisis, although it may have caused greater long-term loss to poor people who depend on natural resources for their livelihoods.

Managing global risks

International lending in medium- and long-term bonds and bank loans reached US$1.2 trillion in 1997, up from US$0.5 trillion in 1988. World trade in goods and services, though growing significantly since the early 1970s, was dwarfed by international financial transactions of more than five times the value of world trade. Such globalization has large benefits, but it also introduces risks associated with financial integration and capital flow volatility. In times of financial crises, the poor suffer disproportionately and need to be protected. These volatilities need to be managed in order to reap the potential gains. In addition to sound macroeconomic management and investments in people, governments can mitigate the risks by deepening domestic financial markets, strengthening regulation and financial supervision, introducing effective corporate governance mechanisms, and providing social safety nets, in order to maintain public support for open capital markets.

The report features new findings on the links between financial openness on the one side and civil and political openness on the other. These include a positive association among financial openness, re-distributive policies, and civil and political liberties. Financial openness, democratic processes (reflected by civil and political liberties), and government spending for social protection seem to go hand in hand.

Improving the quality of governance

Poor governance - especially corruption, bureaucratic harassment and the lack of checks and balances - harms growth and the everyday lives of the poor. It allows the vested interests of an economic elite to unduly influence, or even buy, the policies, regulations, and laws of the state. The social costs are enormous.

Allowing people to influence decisions that affect their lives is vital for increasing transparency, providing the necessary checks and balances against corruption and bureaucratic abuse, and countering efforts by economic elite to manipulate state policies for their narrow advantage. The engagement of civil society in fair and transparent decision-making in partnership with reformers in the executive, legislative, judiciary, and private sectors can make the difference between a well-governed and a misgoverned state, between a stagnant and a thriving society.

Civil and political liberties are also linked positively to improved governance, less corruption, and more effective public spending and delivery of government services. They also constitute in themselves a fundamental aspect of well-being.

Research indicates that the impact of increased participation and better civil liberties variables on development project performance is consistently positive. If a country were to improve civil liberties from the worst to the best, the economic rate of return of these projects could increase by an estimated 7.5 percentage points, and in some cases possibly by three times as much.

According to Quality of Growth, better governance is associated with better development outcomes as shown better in Fig. 3.

Figure 3. The Development Dividend of Good Governance

For the data, see http://www.worldbank.org/wbi/governance/

Infant Mortality=Deaths per 1,000

Going forward

The report questions why policymakers and practitioners in industrial and developing countries, as well as external agencies, continue to rely so heavily, and often solely, on the pace of GDP growth as the measure of progress, when there are powerful examples in national life that show that it is the quality of growth that matters.

A country's wealth includes not only its physical capital, but importantly its human and social capital as well as its natural and environment capital. And yet there is systematic under-investment in human capital, and an over-exploitation of natural capital. Meanwhile subsidies to physical capital worldwide seem to remain large. At the aggregate level, (gross) subsidies provided to agriculture, energy, road transport and water amounted to $700-$900 billion in the early 1990s. Two-thirds of these subsidies were in the industrial countries (about 2.5% of GDP) and one-third in the developing countries (about 5% of GDP).

The report says that embracing all three forms of assets is crucial if development is to deliver better outcomes. Equally, for these ingredients to form a broader development framework, governments will need to join forces with other key groups in civil society . Allied with development agencies working together at the national and global level, the goal of reducing poverty and improving the lives of hundreds of millions of the world's people could have an unprecedented chance of success.

"The opportunities made possible today by new technologies such as the Internet, increased political and economic openness, and the sharing of knowledge and expertise, have never been more plentiful," says Thomas. "At the same time, the challenges of poverty, population growth, environmental degradation, financial distress, and poor governance have never been greater. We simply need more of better 'quality' growth. This is not a luxury. It is crucial for countries to seize the opportunities for a better life for their present and future generations."

For more information on the World Bank's work on governance, visit

www.worldbank.org/wbi/governance/

To participate in an electronic discussion on The Quality of Growth, visit:

http://www.worldbank.org/devforum/forum_qog.html