20035 January2000 Perceptions and Public Disclosure Authorized Altered Reality: ~rfer inS tConoinies !~~~~~~~~~~~ in t At Public Disclosure Authorized s~ Mti.3 Public Disclosure Authorized by Shahid Javed Burki Public Disclosure Authorized Changing Perceptions and Altered Reality: (© 2000 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing January 2000 1 2345030201 00 This report has been prepared by the staff of the \Vorld Bank. The judgments expressed do not necessarily reflect the views of the Board of Executive Directors or of the governrments they rep:resenr.. The material in this publication is copyrighted. The World Bank encourages dis- semination of its work and yvill normal:.y grant permission promptly. Permission to photocopy items for internal or personal use, for the internal or personal use of specific clients, or for educational classroom use, is granred by the World Bank, provided that the appropriate fee is paid directly to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, U.S.A., tele- phone 978-750-8400, fax 978-750-4470. Please contact the Copyvight Clearance Cencer before photocopying items. For permission to reprint individual articles or chapters, please liax your request with complete information to the Republicationi Department, Copyright Clearance Center, fax 978-750-4470. All other queries on rights and licenses should be addressed to the World Bank at the address above or faxed. to 202-522-2422. The painting on the cover is by Jamaican artist Ken Spencer and is in the Latin American and Caribbean collection of the author. Library of Congress Cataloging-in-Publication Data Burki, Shahid Javed. Changing perceptions and altered reality: emerging economics in the 1990s / Shahid Javed Burki p. cm. Includes bibliographical references. ISBN 0-8213-4592-3 1. Developing countries--Econcmic policy. 2. Economic developrnent. 3. Povertv-Developing countries. 4. Financial crises-Developing countries. 5. Econonic history Developing countries. 1. 'l'ile. HC59.7.B857 1999 338.8'009172'4-dc21 99-047581 Cll' CONTENTS Preface ................................... v PART I: An Evolving View of Development Challenges.......... 3 Chapter 1: Changing Perceptions and Altered Reality ............................ 5 Chapter 2: Development Challenges: Reaching a Better Understanding ...................... 23 Chapter 3: Toward Open Regionalism in LAC ....... 33 PART II: Alleviating Poverty............................ 47 Chapter 4: Global Economic Crisis and Poverty ...... 51 Chapter 5: Protecting the Poor during Periods of Economic Crises .......................... 53 Chapter 6: Crime and Poverty .................. 61 Chapter 7: Poverty Returns to Pakistan ............ 69 PART III: Globalization, Financial Crises,and Volatility .... .... 81 Chapter 8: Globalization: Institutional and Organizational Imperatives for the Developing World ...................... 83 Chapter 9: Latin American Economic Crises and Prospects ............................ 91 Chapter 10: New Initiatives to Tackle International Economic Turmoil: A Comment . .101 lii C ha,giug ereception s an,d Altered R,a.iry EMERGING ECONO\IIES IN THE I 990S Chapter 11: Latin American Economies and the Global Economic Turmoil ............... 105 Chapter 12: Volatility,Contagion, and Possible Dollarization ........................... 111 PART IV: Countriesin Economic Crises ................... 119 Chapter 13: T:he Languageof Economic Discourse . .............................121 Chapter 14: From (llobalization to Localization..... 129 Chapter 15: Pakistan in Crisis: A Diagnosis of Its Causes and an Approach for ResolvingIt .... ...... 133 Chapter 16: A Fate Foretold: The World Bank and the Mexican Crisis ....................... 175 Chapter 17: The Relevanceof the Chinese Model for Bringing Cuba into the International Economic System........................ 187 Chapter 18: Integrating Small States in a Fast-Changing Global Economy ............. 195 1'p PREFACE T HIS SMALLVOLUME IS BEING PUBLISHED UNDER THE auspices of the knowledge management program of the World Bank's Latin American and Caribbean Region (LAC).An important part of this program is to assist staff to reflect upon their experiencesin the Wortd Bank for the benefit of their colleagues.I am leaving the Bank after 25 years, 12 of which were spent in operations. I was the director of its China Department for nearly seven years and regionalvice president for LAC for five and a half years. A South Asian, arriving to work in Latin America and the Caribbean after hav- ing spent some time working on China, was bound to look at the countries for which he was now responsiblefrom a different angle. That is the subject of the first section of the book. It tells how I first saw the Latin America region in early 1994, and how my perceptions changed over time. It also details some of the ini- tiatives I took to improve our-in particular my-understanding of the econom- ic and social problems faced by the countries of the region. The second section of the book deals with poverty-a long-time concern of mine. Throughout my stay at the World Bank, I was involved in one way or another with our work on poverty.When I moved to LAC, I brought this interest with me. From the very beginning I focused on two characteristics of Latin American and Caribbean poverty: the fact that most of it is urban, and that its incidence changes dramatically over time. Economic ups and downs have a pro- found impact on the number of people living in poverty.This is the subject of a severalspeeches included in this volume. This section also includes a speech I gave in Pakistanon poverty in that country. It is included in this volume to underscore an important point: unless policymakersare vigilant, even when it is reduced sig- nificantly, as was the case in Pakistan,poverty can return with a vengeance. The third section includes a number of speecheson various aspects of global- ization. My emphasis in dealing with this subjectwas on three questions:what was meant by "globalization,"how did it affect the developing world, and was it pos- sible to control the volatility associatedwith it by devisingsomething called a "new financial architecture." The last section of the book presentsfour case studies dealingwith countries in crises.The main point of including these casestudies is to underscore the view that v C.hanging Perceptions aitd Altered Real,ty: F.ME RE; ING ECON OMIFS IN THE 1 990S crises in recent years have been the pro(luct of an interplay between domestic poli- cies and changes in the external economic environment. Not one of the four cases included in this selection was the consequence of changes over which the coun- tries experiencing difficulties had no control. In none of these cases were the caus- es of the crisis exogenous in their entirety; they came about largely because of actions the countries themselves had taken-or had failed to take. I write my own speeches. Even wheni some background work was done for me, I felt comfortable only when I was speaking from my own text. That notwith- standing, I would like to thank Robert Ayres for his help with the speech on crime and violence, Suman Berv for the chapter on the Mexican crisis. and Guillermo P'erry for the speech on regional trade arrangements. I owe a great debt to Jennifer Abne.r, who not only typed and retyped texts as rny thinking developed while the speeches were being written, but also kept a watchful eye on my grammar, syntax, and flow of thought. This volume would not hiaveseen the light of day but for her assistance. Thanks are also due to Joost Polak for overall editorial support in putting together this volume. Finally, I would like to thank the Latin American and Caribbean Region's knowledge management program for its support of tlhls project. Shahid Javed Burki WX'ashington,D.C. June 1999 vt PART I An Evolving View of Development Challenges P'A RT I An Evoking Vit,, of Developrnent C.hallenges PART I An Evolving View of Development Challenges INTHE FIRST SECTION OF THIS COLLECTION, I HAVE INCLUDED THREE pieces.The first is an overviewof the way my thinking evolved in the last five and a half years, the period during which I was the Regional Vice President for Latin America and the Caribbean (LAC).This chapter is based on a talk I gave on May 14, 1999 at the last "corporate retreat" I attended for the LAC Region managers. It is essentiallya personal account that provides, in a reasonably chronologicalorder, the evolution of my own thinking about development issues of interest to Latin America and the Caribbean. The second chapter dealswith some of the initiatives that I took, such as estab- lishing an external advisorygroup, launching a seriesof annual conferenceson the development problems and prospects of the region, starting a regional studies pro- gram and a dialogue with nongovernmental organizations (NGOs), especially those working in the field, and developing a close working relationship with the Commonwealth Secretariatto deal with the special problems of small states. One messageI hope will emerge from reading these two speechesis that there is a good deal to be learned from the experiencesin development of different geo- graphical regions. Latin America and the Caribbean can learn from the East Asian and Pacificcountries. Equally, there is a good deal that the LAC Region can teach East Asia. In terms of gross national product per head of population, the two regions are more or less at the same stage of development, but they have adopted approaches toward change that are quite different. This experience reveals that there is not just one model of development. Economic improvements take place in many different ways,and each is dictated in part by the history, the culture, and the structure of the society seeking to transform itself. But change must also take cognizance of the external environment in which it must occur.