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June 21, 1999

Indicators for Developing Countries Show Some Unexpected Declines

The 1999 World Bank Development Indicators show widening gaps between rich and poor.

Poverty has increased sharply in Eastern Europe and the former Soviet Union since the region began its switch to a market economy, according to the 1999 World Bank Development Indicators. The number of people in the region living below a poverty line of $4 a day jumped from about 14 million in 1989 to some 147 million in the mid-1990s, or one person in three.

The World Bank's chief economist and senior vice president, Joseph E. Stiglitz, calls the failure of the transition to a market economy to improve living standards ''one of the most interesting questions, and one we are spending a lot of time pondering.''

Most economists predicted 10 years ago that the end of Soviet central planning and the introduction of property rights and fair prices would release a burst of energy, improve efficiency and lead to higher output, Mr. Stiglitz notes. Instead, the reverse has happened. ''I think the lesson we've learned is that market economies are far more complicated than textbook models often describe them,'' he says, ''and that issues of governance, legal infrastructures and institutions are absolutely central.''

A lose-lose situation?

In almost all Central and East European countries, the gap between the rich and the poor has widened, contradicting the economic law that says there is a trade-off between inequality and growth. The indicators show that there can be ''negative growth and increasing inequality,'' Mr. Stiglitz says. ''So they have gotten the worst of both worlds.''

Looking ahead, the World Bank expects sharp declines in growth and increases in poverty in Russia, Ukraine and Romania. This means that despite a healthy performance in Poland, Hungary and other parts of Eastern Europe and Central Asia, gross domestic product in the region is not likely to expand at all in the near future.

Overall, the indicators show that uncertain economic prospects in the former Soviet Union, slower growth in Asia and Latin America and the spread of HIV/AIDS in Africa cast doubt over reaching key development goals for the 21st century.

In 1990-97, East and South Asia were the only regions growing rapidly enough to be able to halve poverty by 2015, says the third edition of the indicators. Now, only South Asia and China are expected to grow fast enough.

''A year ago, we confidently predicted that the international development goals of halving poverty, cutting infant and child mortality by two-thirds and enrolling all children in primary education could be met,'' says World Bank President James D. Wolfensohn. ''Now, those goals are at risk, and we must draw on the lessons of recent experience to help reshape our strategies for the future.''

The gap between rich and poor has widened in a number of developing and emerging countries other than those in Central and Eastern Europe. In 34 of them, including Jordan, Malaysia, Peru, South Africa, Venezuela and Zambia, the richest 20 percent of the population receives more than half the country's income and the poorest 20 percent receives less than 5 percent. In Germany, by comparison, the poorest 20 percent receives 9 percent of income and the richest 20 percent of the population 22.6 percent of income.

On the positive side, the report noted that India and China, which together account for about 38 percent of the world's population, largely escaped the financial crisis that engulfed most of their Asian neighbors.

Girls caught up with boys for school enrollments in most high-income Latin American, Caribbean and East European countries, and world trade continued to grow despite protectionist pressure in some countries and fallout from the financial turbulence in emerging markets. Comments Mr. Stiglitz: ''Over the past 25 years, we can see how living standards have risen dramatically. Since 1970, food production has outpaced the population growth of nearly 2 billion, and 70 percent of adults in the developing world can read today.''

Another recent World Bank report, the 1999 edition of Global Development Finance, shows that development aid is stagnating at a 50-year low. Last year, industrialized countries spent less than 0.25 percent of their gross national product on aid, down 38 percent from the beginning of the 1990s.

At the same time, long-term capital flows to developing countries dropped about 19 percent, to $275 billion last year from $338 billion in 1997. The decline was particularly sharp in the second half of 1998, with new bond and loan financing for developing countries plunging to about half the average of the first six months of the year. ''Improved policies in many low-income countries mean that aid is more effective than ever in reducing poverty,'' Mr. Stiglitz says. ''It is a cruel irony that just as the sudden drying up of volatile commercial loans makes aid more urgent than ever, it is shrinking.''

Barbara Casassus

©Copyright 1999, International Herald Tribune

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