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Forces Reshaping the World Economy JEAN-FRANCOIS RISCHARD Vice President, Finance and Private Sector Development, World Bank The world has entered a period of massive shifts in its economy. Among the many changes likely to occur, China will be the world's largest economy by 2020; digital television and telephone systems will completely change the way people and businesses communicate; and such traditional activities as deposit banking may become shadows of their former selves. Behind these changes and the reshaping of the world economy are two major forces: a technology revolu- tion and an economic revolution. TECHNOLOGY REVOLUTION A cluster of innovations centered around telecommunications and informatics has produced a revolution in information technology. Although this revolution is still young, with the full blooming of digitalization and of full bandwidth exploi- tation still some years away, it is a very powerful one. Three reasons are behind this potency. First, information technologies are helping to unleash the potential of other technologies, creating subrevolutions in other areas. In transportation, for ex- ample, the container revolution, associated with hub airports, low-cost cargoes, and fast shipment methods, owes its existence to advances in information tech- nology. Likewise, startling changes in high-performance materials, biotechnol- ogy, and robotics, and in programming and software applications of every pos- sible kind, have been made possible by the information technology revolution. Second, these information technologies are about information flowing faster, more generously, and less expensively throughout the planet. As a result, knowl 8

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JEAN-FRANCOIS RISCHARD 9 edge is becoming an important factor in the economy, more important than raw materials, capital, labor, or exchange rates. And third, whereas earlier technology revolutions dealt with the transforma- tion of matter or energy, the information technology revolution is all about time and distance. It is no great surprise, then, that the technology revolution is pro- ducing a companion revolution in business practices worldwide which can be illustrated by five examples. First, evident almost everywhere today are accelerated, flexible business processes. Toyota, for example, has saved billions by adopting just-in-time in- ventory methods. Clothing retailer Benetton has a complete reorder cycle of two to three weeks the time that elapses between purchase of a pullover in New York and the shipment of a replacement pullover manufactured in Sri Lanka. This was unheard of several years ago. A second aspect of new business practices is hypercompetitive purchasing worldwide. Big U.S. department stores now solicit bids for cotton goods from 10 countries at a time. This was never the case before. Ford Motor Company is reorganizing itself around the concept of the global car, for which parts purchas- ing will be effected worldwide on a best-price basis. And electronic shopping networks are popping up, using electronic interactive catalog systems. Third, smaller units with smaller sizes, lower overheads, shorter feedback loops are gaining the advantage over larger units. This trend will probably lead to the reemergence of family firms and, in general, the emergence of healthy, export-oriented, mid-sized firms. Big companies such as General Electric are breaking themselves up into a collection of smaller enterprises in order to main- tain that small enterprise spirit. And flatter organizations--that is, with fewer hierarchical levels are in vogue. For example, ABB, a large company that pro- duces electrical turbines, just recently reduced the number of layers between its top management and the ranks. A fourth aspect of this business practice revolution is the impending explo- sion of remote services that once were considered untradable. SwissAir has its revenue accounting done in Delhi. The Indian software industry already has captured a $500 million piece of the total turnover of the industry. In Washing- ton, some doctors dictate into a telephone memos, which are then typed in Bangalore, India, in real time onto the doctors' computers in Washington. Even Romania, long backward economically, already has scores of teleporting firms in place. Finally, there is the incredible flow of private capital $175 billion last year into developing countries, pouring in very quickly without regard for boundaries. (In the late 1800s, private capital flowed worldwide in this way.) As a result, the scrutiny of the World Bank or the International Monetary Fund (IMF) is being complemented by the scrutiny of private investors, who also are strong disciplinarians when it comes to demanding good management, open books, and disclosure.

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10 Marshaling Technology for Development ECONOMIC REVOLUTION In addition to the technology revolution, with all the changes it has meant for business practices, there is the economic revolution, which has seen the massive entry of large new players into the world economy. When the IMP and the World Bank recalculated in 1993 the gross domestic products (GDPs) of all countries using the purchasing power parity method (it is better than current exchange rates), they were surprised to find that the non-member countries of the Organiza- tion for Economic Cooperation and Development (OECD) accounted not for a quarter of world GDP but approximately 46-47 percent, rising probably to about 50 percent if the black market economies are included. Moreover, in years past similar growth rates were calculated for both OECD and non-OECD countries. Now, however, the non-rich countries have growth rates that are two to three percentage points higher than those of the OECD countries because they have discovered capitalism and market-oriented policies. They also start from a lower base and have younger populations than the fiscally challenged, aging OECD countries. When these two facts are put together, it means that two-thirds of the in- creases in world GDP will come from the non-OECD countries the non-rich developing and transition countries-indicating an enormous shift in business opportunities toward the South and the East. Within this equation, China will regain its number one position in 2020, 200 years after it lost the title; India is poised for growth; Latin America will fare well despite the Mexican setback; Poland had the highest growth rate in Europe last year; and even some isolated countries in Africa and the Middle East are doing quite well. It has even been calculated that in 2010 the middle class in Asia people earning $1 1,000-$12,000 a year will comprise 750 million people. The twenty-first century, then, will see a replay for the developing world of what the 1950s and the 1960s were for Europe and Japan. That is what the economic revolution is all about. A GOLDEN AGE? Together, the technology revolution and the economic revolution are pro- ducing a completely new world economy that is high-speed, knowledge-driven, global, and disciplinarian. For 4 billion of the world's people it could be the birth of a Golden Age of sorts; for the first time they will have a serious opportunity to catch up with the rest of the world. They may even be able to leapfrog ahead in some areas. The planet, therefore, will become more balanced than it is today- a time when 15 percent of the people are consuming 85 percent of the goods and services. Another reason to believe in some kind of Golden Age is that the information technology revolution is likely to be followed in a generation or so by revolutions in biotechnology and solar energy. It will, however, be a very stressful Golden Age because of tremendous

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JEAN-FRANCOIS RISCHARD 11 demographic stresses as the world's population doubles over the next two genera- tions. Environmental stresses in the form of deforestation, soil erosion, water and air pollution, loss of fisheries, and toxic wastes will be a serious concern every- where. Much of the pollution will stem from the use of fossil fuels to generate energy. In the future, for example, India and China will account for two-thirds of the increase in world energy consumption. To meet the demand of its people, China will have to build one 1,000-megawatt power plant a month for the next 30 years, and most of them will be coal-based. But to demographic and environmental stresses must be added a third kind of stress: the race for competitiveness and the finish line keeps moving farther and farther away. To compete in this race, rich and poor countries alike need three things: agility, networking, and learning. Agility is the leitmotif of this age, for firms as well as for enterprises. At the firm level, some U.S. shirt companies have reportedly returned 20 percent of their shirt production to the United States from the Far East because the turnaround time of U.S. shirt manufacture is so much shorter. These companies found that factor more important than the labor differentials with the Far East. An example of government agility: Singapore's customs system has reduced the time required to clear a ship through customs to 10 minutes by using electronic data inter- change and other methods. Thus Singapore has now set the benchmark for agility in this area, which must be matched by everyone else in the world. Networking, or getting plugged into global webs of relationships, is some- thing all countries will have to work on, and there are many tell-tale signs that this is already happening. For example, strategic alliances in all their forms have tripled since 1990. Another sign of the age is the emergence of networkers in the form of big, cosmopolitan tribes such as the Sindhis in India and the overseas Chinese. ~ Finally, countries will have to turn into learning nations because in the new global economy static comparative advantages are not enough; it is important to continually upgrade, learn, and stay with the flow. No one knows this better than the Colombian flower industry. After managing, over 10 years, to build a suc- cessful indeed, miraculous-export business that was selling half a billion dol- lars a year in cut flowers to the United States, the Colombians are now struggling to defend their market share and their profitability against Dutch and other ex- porters, who have done a better job of upgrading their flower species, conserva- tion methods, and transportation methods. THE CHALLENGES FACING DEVELOPING COUNTRIES AND THE DEVELOPMENT COMMUNITY The developing countries face massive new challenges. Not only will they have to deal with worsening population, environmental, and social problems, but they also will have to meet the ever-rising competitiveness threshold, expressed

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12 Marshaling Technology for Development in terms of agility, networking, and learning, if they want to grasp the unprec- edented opportunities offered by the new world economy. All this adds up to a future in which the distinction will be not just between rich and poor countries, but between fast and slow countries, plugged-in and isolated countries, learning and static countries. Thus the development job is not at all over; it is just becom- ing more complicated. The new development paradigm calls for vigorous action on three fronts: on the people and poverty front, on the environmental front, and on the growth and competitiveness front through private sector development, but also more generally through a kind of economy-wide pursuit of these higher agility, networking, and learning standards. Now 50 years old, the World Bank Group, which includes the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multi- lateral Investment Guarantee Agency (MIGA), is increasingly organizing itself and its agenda along the three dimensions people and poverty, environment, and growth and competitiveness to face the challenges of the new world economy. The institution itself is undergoing major changes. Since World War II, the World Bank Group has financed some 5,000 projects in 140 countries for a total of $300 billion, all based on less than $10 billion of shareholders' capital paid into the IBRD, which is the Group's main vehicle. The shareholders now number 178 near universality. Lending, however, has stagnated over the last five years, in part because it is being replaced by private flows. Meanwhile, the Group is becoming more and more involved in nonfinancial services as objective advis- ers to governments, as best practice collectors and disseminators, as brokers, and even as fiduciary agents. Thus, just as growth and development are becoming more and more knowledge-intensive and less resource-intensive, the World Bank Group is moving beyond its money role and assuming, in addition, the role of purveyor of ideas and knowledge as it goes ahead. And it must do this with an even more diversified set of clients than before. The Eastern European countries, for example, have problems that differ drastically from those in Africa. HOW CAN TECHNOLOGY HELP? Today, technology probably has a bigger role to play in developing countries than at any time. Poverty can be tackled with the new technologies available in the fields of health care, population planning, basic education, food and agricul- ture, and infrastructure and basic services. For environmental problems, not only are there new technologies, but even existing ones will make a big difference in, for example, energy efficiency, exploration of new forms of energy, better forms of transportation, and new methods of fertilization. As for growth and competi- tiveness, the advanced telecommunications and informatics technologies will permit leapfrogging, as will the new distance education methods, production processes, and teleporting.

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JEAN-FRANCOIS RISCHARD 13 But how does one bring these technologies to bear on development prob- lems? First, the developing countries must raise their leaders' and their popula- tions' awareness of the imperatives of the new world economy and of the unprec- edented role of new technological opportunities. Second, they must create an environment that is receptive to new technologies and to innovation. This will require: Ensuring macroeconomic, legal, and political stability and predictability Adopting policies that are receptive to everything that is open-open trade, foreign direct investment, foreign licensing, joint ventures Encouraging support institutions of the smart kind, particularly technical schools, business schools, applied research labs that serve as lookout posts for what is happening elsewhere, technology or productivity centers, and standards and patent institutes Building adequate power, information, transport, and financial infrastruc . lures Enacting private sector-friendly policies that help to bring about a vibrant home base for enterprises, and, most important, for clusters of related enterprises. Finally, to bring technology to bear on development problems a developing country must bring in the know-how and successfully ensure its implementa- tion that is, its incorporation into local production, marketing, and service pro- cesses. But this will be a very complicated undertaking. In contrast, it is no longer as important to create local capabilities in basic research as it was two decades ago. Many of today's new technologies are more easily available and more sociable-some might even say promiscuous than in the past. For example, the knowledge and software tools for designing new cir- cuits can be taught in a classroom with a CD-ROM or downloaded over a tele- phone line. OBJECTIVES OF THIS SYMPOSIUM The purpose of the Symposium on Marshaling Technology for Development is to find ways in which the National Academy of Sciences and the World Bank Group can complement each other for the benefit of the developing countries. In such a strategic alliance between these two institutions, the National Academy of Sciences, through its operating arm, the National Research Council, could con- tribute its knowledge of new technological developments, their potential impacts, and what is needed to implement them. The Academy also has access to a net- work of researchers and scientists around the world. The World Bank Group could contribute to such an alliance its knowledge of developing country conditions and institutions, as well as its access to a world- wide network of government and nongovernment institutions, development agen- cies, and business associations. Working together, these two institutions could

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14 Marshaling Technology for Development offer a dynamic combination able to make a significant contribution to the devel- oping countries as they face the unprecedented opportunities and challenges of the new world economy. The specific objectives of this symposium are very practical: to get a sense of the trends and the impacts of new technologies in all the sectors that are important; to create greater awareness of the opportunities, particularly for those in the development community who have been lagging behind; to explore pos- sible roles for the various actors governments, private sectors, development agencies, and scientific institutions; and to determine what intelligent initiatives could be mounted, either in a sector or across sectors. But one of the nicest outcomes of this symposium would be an ongoing fruitful relationship between the two sponsoring institutions, the World Bank Group and the National Acad- emy of Sciences. NOTE 1. For a fascinating description of this phenomenon, see Joel Klotkin, Tribes: How Race, Reli- gion and Identity Determine Success in the New Global Economy (New York: Random House, 1992).