http://www.worldbank.org/html/prddr/trans/WEB/trans.htm http://www.wdi.bus.umich.edu THE NEWSLETTER ABOUT REFORMING ECONOMIES Public Disclosure Authorized TRANSITION Volume10, Number 4 The WorldBank in collaborationwith The WilliamDavidson Institute August1999 A Changing Development Landscape: Globalization and Localization 19677 World Development Report 1999/2000 August1999 by Shahid Yusuf WorldDevelopment Report 1999/2000: Entering the 21st Centuryexplores the avenuesfor institutionalchange and catalogues Public Disclosure Authorized themajor issues confronting the worldin the early 21stcentury. These issues include macroeconomic instability resulting from openness,decentralization, rapid urbanization, and climate change. Both globalization and localization will shape the development landscapein the early21st centuryBoth forces have a long,albeit somewhat fitful history The response of nation-statesto these twoforces will determine whether incomes in low-incomecountries converge with those of industrialcountries and whether efforts to eliminatepoverty from tomorrow's world are ultimatelysuccessful. Globalization entered the develop- Organization(WTO). The adoption of com- ment discourse in the early mon rulesto regulatebanking and financial What's Inside 1980s. Now it is common cur- reportinglent further momentum, as did the rency and denotesthe integrationof mar- creation of the World Wide Web and an WhatWent Wrongin Ukraine? 3 kets for goods and factors of production, international movement toward product UnsolvedGovernance in China'sSOEs 5 along with the increasing commonalityof standardslike the ISO 9000. Public Disclosure Authorized standards and consumer tastes. Starting Migrationin TransitionEconomies 8 in the 1980s many countries began dis- Greaterreceptivity toward FDI and the ease Developmentsin Russia mantlingcontrols on the movementof capi- of transactionsoverlong distances induced * MoneyLaundering Scandal 11 tal and adopting a more favorablestance companies to reorganize their activities, * Conglomeratesand their Future 14 to foreign direct investment(FDI). Declin- slice up the value-addedchain, and distrib- * SurvivalStrategy of 12Oligarchs 16 ing transportcosts and advances in com- ute production facilities across markets. * Reader'sForum: Stealing the State 17 municationsand information technology This spatial diffusion and the widening of tightened the integration of goods and marketsare behindthe proliferationof pro- UNDPReport-Transition's Dark Side 19 capital markets. ductionnetworks, which allows firms to spe- * HumanDevelopment Ranking 21 cialize, focus their research efforts, and Overhaulof Statisticsin Transition Getting Global ... leveragetheir scarcemanagerial and mar- Countries 22 ketingskills. Cross-country production net- The Uruguay Round in 1994 significantly workshave reinforced the impulsereleased WilliamDavidsonInstitute25-31 lowered trade barriers and enlarged the bythe liberalizationoftradeand the removal Women'sIssues in EasternEurope 32 Public Disclosure Authorized gambitof trade liberalizationto includeser- of barriersto capital mobility. WorldBank/lMFAgenda 33 vices,intellectual property rights, agricultural Milestonesof Transition35 commodities,and textileswhile anchoring Even with these changes, globalization New Booksand WorkingPapers 37 the newrules of the gamein the WorldTrade might have remaineda weak force were it Bibliographyof SelectedArticles 43 DevelopmentResearch Group The World Bank M TheWilliam DavidsonInstitute not for a seismic shift toward market- The pull of local identity is manifested Gains and Risks based economies and democratic forms through the followingdevelopments: of government symbolizedby the tearing Globalizationand localizationpromise in- down of the Berlin wall. This rise of politi- * Nation-statesmultiplied from 96 in 1980 creased availabilityand more efficient al- cal participation also feeds centrifugal to 192 in 1998. location of resources,freer circulation of pressureswithin nation-states. knowledge,more open competition, and 0 The processof political and functional improvedgovernance. But there are down- Membershipin the WTO increasedfrom decentralization-pointing towardpartici- sides and risks as well. Globalizationen- 102 countries in 1990 to 134 in 1998. patory democracy-is continuingin large tails greater exposure to external shocks Trade in goods and services rose twice and small states. Half the countries that and capitalvolatility-recently highlighted by as fast as gross domestic product (GDP) decentralized also devolved major func- the EastAsian crisis-along with numer- during the 1990s. By 1998 FDI in devel- tional responsibilities. In many countries ous environmentalconsequences. Mea- oping and transition economies reached suresto decentralizein orderto satisfylocal a net $155 billion-1 6 times larger than in demands can lead to macroeconomicin- 1990.International trade that flowsthrough stabilityand lack of fiscal prudence.On the global production networks is now one- other hand fiscal rules can buttresspoliti- third of total trade. One dark side of glo- cal autonomyby assigningrevenue bases, balization,however, is the rapid spread of 7 responsibilities,and prescribing revenue harmfulsubstances and pollutants. sharing arrangementsbetween the center and localities.Efforts to raise urban living . .. and Localat the Same Time standards could prove elusive if policies cannotprevail over the spread of poverty, Nation-statesincreasingly focus on supra- violence,and squalor. nationalissues such as globalization,which circumscribe their choices. Simulta- Recentstrides in developmentthinking have neously, localization is forcing states to begunto definea pragmaticagenda of insti- take note of subnational dynamics and of Eastern Europe and Central Asia tution buildingand policiesthat exploitthe accommodatedemands coming from the subnationalgovernments evolved follow- gains and containthe risksfrom these two local level. ing the collapse of the earlier autocratic forces.For example,rules for fiscaldecen- regimes. tralizationcan establish the sharing of respon- Localization demands autonomy and a sibilities between central and subnational politicalvoice for regionaland community 0 Urbanizationis continuingby leaps and governments.All change courts risk. The needs. It has many motives,including: bounds.At the turn of the 21st centuryhalf downsideof globalizationand localizationis the world's populationwill be living in ar- starklyapparentfromthe EastAsiacrisis and * Dissatisfactionwith the state's ability to eas classified as urban. As recently as thestate-induced fiscal crises in Brazil.These deliver on developmentpromises. 1975this sharewas just over one-third;by forcesare generatingmuch of the stimulus 2025it may riseto almosttwo-thirds. While behinddevelopment. Minimize the risksand * Strength of local and ethnic identity,re- the rate of urbanization has passed its ensuringthatdevelopment is stable and sus- inforced by education,better communica- peak in the higher-income countries of tainablearetheobjectivestostrivefor.Asthis tions, and the rising concentration of Eastern Europe,the transition is just be- reportshows, the roadto sucha desiredfu- people in urban areas. ginning in Asia and Africa.An increase of tureis pavedwith goodinstitutions. almost 1.5 billion people is expected in * Desire to deepen the sense of belong- urban populationsover the next 20 years. Excerptedfrom an article to be published ing somewherein a world in which global- While the public sector is likely to remain in the IMF's Financeand Development. ization levelscultural differences. the key player in planning urban develop- Shahid Yusufis staff directorof the World ment and providing basic services, part- Banks'DECWDteam, in chargeof prepar- * Sharpening competition among nerships between the public sector, ing the World DevelopmentReport 1999/ subnational units in an open environ- nongovernmentalorganizations (NGOs), 2000 to be published in mid-September. ment, along with the reluctance of richer and private entities have become an im- Website: http.//vww worldbankorg1wdr/2000/ entities to share their resources with less portant source of capital, skills, manage- home.htm; Email:world_development_re- well-off neighbors. ment,and initiativethroughout the world. port @worldbankorg. a TRANSITION,August 1999 ( 1999 The WVorldBank/The William Davidson Institute What Went Wrong with Foreign Advice in Ukraine? by Vira Nanivska Reformin Ukrainehas been greatlyhampered by its government'slack of institutionalcapacity for policymaking.The reform processwas conceived, designed, and guided by donors.So whatwent wrong? Somehow the political will to go the"Western way" did not manifestitself in concretepolicy decisions. The governmentlacked the institutionalcapacity to make radicalpolitical choices.To fix whathas already gone wvrong, Westem technical assistance must be reassessedand shifted to enable Ukrainians to initiatetheir own institutional capacity building. A fterUkraine gained independence another, and the governmenthas been Duringthe Soviet period the Ukrainian gov- in December1991, the general boggeddown in puttingout fires. ernmentdid not haveany realgoverning /A view was that it had greateco- responsibilities;rather, itwasfullyengaged nomic potential.Already blessed with Whilereformists did not havethe neces- in thedistribution of resourcesand the di- well-educatedpeople, abundant natural saryskills, experience, or resourcesto de- rectmanagement of a huge,country-sized