MCQs and Answers

Around the globe, the state is in the spotlight. Far-reaching developments in the global economy have us revisiting basic questions about government: what its role should be, what it can and cannot do, and how best to do it.

The last fifty years have shown clearly both the benefits and the limitations of state action, especially in the promotion of development.

Governments have helped to deliver substantial improvements in education and health and reductions in social inequality. But government actions have also led to some very poor outcomes. And even where governments have done a good job in the past, many worry that they will not be able to adapt to the demands of a globalizing world economy.

The new worries and questions about the state’s role are many and various, but four recent developments have given them particular impetus:

» The collapse of command-and-control economies in the former Soviet Union and Central and Eastern Europe

» The fiscal crisis of the welfare state in most of the established industrial countries » The important role of the state in the “miracle” economies of East Asia

» The collapse of states and the explosion in humanitarian emergencies in several parts of the world this Report shows that the determining factor behind these contrasting developments is the effectiveness of the state. An effective state is vital for the provision of the goods and services-and the rules and institutions-that allow markets to flourish and people to lead healthier, happier lives.

Without it, sustainable development, both economic and social, is impossible. Many said much the same thing fifty years ago, but then they tended to mean that development had to be state-provided. The message of experience since then is rather different: that the state is central to economic and social development, not as a direct provider of growth but as a partner, catalyst, and facilitator.

What makes for an effective state differs enormously across countries at different stages of development. What works in the Netherlands or New Zealand, say, may not work in Nepal. Even among countries at the same level of income, differences in size, ethnic makeup, culture, and political systems make every state unique. But this very diversity enriches this Report’s inquiry into why and how some states do better than others at sustaining development, eradicating poverty, and responding to change.

Rethinking the State-the World Over

The world is changing, and with it our ideas about the state’s role in economic and social development. Today’s intense focus on the state’s role is reminiscent of an earlier era, when the world was emerging from the. Ravages of World War II, and much of the developing world was just gaining its independence.

Then development seemed a more easily surmountable-and largely technical-challenge. Good advisers and technical experts would formulate good policies, which good governments would then implement for the good of society.

State-led intervention emphasized market failures and accorded the state a central role in correcting them. But the institutional assumptions implicit in this world view were, as we all realize today, too simplistic. Flexibility to implement the policies devised by technocrats was acc pride of place. Accountability through checks and balances was regarded as an encumbrance.

In a few countries, things have indeed worked out more or less as the technocrats expected. B many countries outcomes were very different. Governments embarked on fanciful schemes. Pr investors, lacking confidence in public policies or in the steadfastness of leaders, held back. Po rulers acted arbitrarily. Corruption became endemic. Development faltered, and poverty endured.

Over the last century the size and scope of government have expanded enormously, particular the industrial countries. The pre-World War II expansion was driven by, among other factors, the need’ address the heavy toll on economic and social systems brought on by the Great Depression.

The confidence in government bred demands for it to do more. Industrial economies expanded welfare state, and much of the developing world embraced state-dominated development.

The result was a tremendous expansion in the size and reach of government worldwide. State spend now constitutes almost half of total income in the established industrial countries, and around an in developing countries. But this very increase in the state’s influence has also shifted the from the quantitative to the qualitative, from the sheer size of the state and the scope of its interment: to its effectiveness in meeting people’s needs.

As in the 1940s, today’s renewed focus on the state has been inspired by dramatic events the global economy, which have fundamentally changed the environment in which states operate, global integration of economies and the spread of democracy have narrowed the scope for and capricious behavior.

Taxes, investment rules, and economic policies must be ever more response to the parameters of a globalized world economy. Technological change has opened new opportunity for unbundling services and allowing a larger role for markets.

These changes have meant new different roles for government-no longer as sole provider but as facilitator and regulator. States h come under pressure even where governments have previously seemed to perform well.

Many countries find themselves grappling with a welfare state that has grown unwieldy, and having to ma difficult choices about the services and benefits that people should expect government to provide Markets-domestic and global-and citizens vexed by state weaknesses have come to insist, often through grassroots and other nongovernmental organizations, on transparency in the conduct of government and on other changes to strengthen the ability of the state to meet its assigned objectives.

The clamor for greater government effectiveness has reached crisis proportions in many developing countries where the state has failed to deliver even such fundamental public goods as property high roads, and basic health and education.

There a vicious circle has taken hold: people and businesses response” to deteriorating public services by avoiding taxation, which leads to further deterioration in services. In the former Soviet Union and Central and Eastern Europe, it was the state’s long-term failure to deliver on promises that led, finally, to its overthrow.

But the collapse of central planning has created problems of i own. In the resulting vacuum, citizens are sometimes deprived of basic public goods such as law and order at the limit, as in Afghanistan, Liberia, and Somalia, the state has sometimes crumbled entirely, leaving individuals and international agencies trying desperately to pick up the pieces.

Acknowledging the state’s existing, possibly meager capabilities does not mean accepting them for all time. The second key task of state reform is to reinvigorate the state’s institutional capability, by providing incentives for public officials to perform better while keeping arbitrary action in check.

Countries struggle to build the institutions for an effective public sector. One reason the task is so difficult is political. Strong interests may develop, for example, to maintain an inequitable and inefficient status quo, whereas those who lose out from this arrangement may be unable to exert effective pressure for change.

But the problem of continued ineffectiveness, or of corruption, is not entirely political. Often politicians and other public officials have strong incentives and a sincere interest in improving public sector performance. But managing a public bureaucracy is a complex business that does not lend itself to clear, unambiguous solutions.

In fact, building institutions for an effective public sector requires addressing a host of underlying behavioral factors that distort incentives and ultimately lead to poor outcomes three basic incentive mechanisms can be used, in a variety of settings, to combat these deeper problems and improve capability Effective rules and restraints Greater competitive pressure the increased citizen voice and partnership. Effective Rules and Restraints

Over the long term, building accountability generally calls for formal mechanisms of restraint, anchored in state institutions. Power can be divided, whether among the judicial, legislative, and executive branches of government or among central, provincial, and local authorities.

The broader the separation of powers, the greater the number of veto points that can check arbitrary state action. But multiple veto points are a double-edged sword: they can make it as hard to change the harmful rules as the beneficial ones.

In many developing countries legislative and judicial oversight of the executive is weak. The setting of goals and the links to the policies needed to achieve them are sometimes diffuse, legislatures suffer from limited information and capability, and judicial independence is compromised.

An independent judiciary is vital to ensure that the legislative and executive authorities remain fully accountable under the law, and to interpret and enforce the terms of a constitution. Writing laws is the easy part; they need to be enforced if a country is to enjoy the benefits of a credible rule of law.

These institutions of restraint take time to establish themselves, but international commitment mechanisms such as international adjudication, or guarantees from international agencies, can serve as a short-term substitute.

A major thrust of any effective strategy to reinvigorate the public sector will be to reduce the opportunities for corruption by cutting back on discretionary authority. Policies that lower controls on foreign trade, remove entry barriers for private industry, and privatize state firms in a way that ensures competition-all of these will fight corruption.

Such reforms should not be half-hearted: reforms that provide opportunities for private entry into closed sectors of the economy, but leave that entry to the discretion of public officials rather than establish open and competitive processes, also create enormous scope for corruption.

Formal checks and balances can also help reduce official corruption, but they are seldom enough. Reforming the civil service, restraining political patronage, and improving civil service pay have also been shown to reduce corruption by giving public officials more incentive to play by the rules.

Where corruption is deeply entrenched, more dramatic efforts will be needed to uproot it. These efforts should be focused on better monitoring of official action-both by formal institutions and by individual citizens-and punishment of wrongdoing in the courts.

In Hong Kong (China, as of July 1, 1997), an independent commission against corruption is one successful example of such an approach. Likewise, recent reforms in Uganda have incorporated several elements of the anticorruption strategy outlined here, with some encouraging results.

The same mechanisms could be applied around the globe: corruption, despite claims to the contrary, is not culture specific. Reducing it will require a multipronged approach, which must include the private sector and civil society more broadly. The briber has as much responsibility as the bribed; effective penalties on domestic and international business must be part of the solution.

Subjecting the State to More Competition: Governments can improve their capability and effectiveness by introducing much greater competition in a variety of areas: in hiring and promotion, in policymaking, and in the way services are delivered.

Boosting Competition within the Civil Service whether making policy, delivering services, or administering contracts, a capable, motivated staff is the lifeblood of an effective state. Civil servants can be motivated to perform effectively through a combination of mechanisms to encourage internal competition:

» A recruitment system based on merit, not favoritism

» A merit-based internal promotion system

» Adequate compensation

Starting in the nineteenth century, all of today’s established industrial countries used these principles to build modern professional bureaucracies. More recently these principles have been applied in many countries in East Asia, which have transformed weak, corrupt, patronage-based bureaucracies into reasonably well-functioning systems. But many developing countries do not even need to look overseas or to history for role models: they exist at home.

Central banks, for example, often continue to work effectively and retain their competence even when all other institutions have declined. These agencies work well for all the reasons listed above. They are less subject to political interference. They have limited but clear objectives.

They are given adequate resources and training. And their staffs are usually better paid than their counterparts in other parts of government.

Cross-country evidence reveals that bureaucracies with more competitive, merit-based recruitment and promotion practices and better pay are more capable. In several countries (Kenya, the Philippines) political appointments run quite deep, whereas countries such as Korea have benefited from reliance on highly competitive recruitment and a promotion system that explicitly rewards merit.

Ongoing reforms in the Philippines are examining these issues in an effort to improve bureaucratic capability. By and large, countries in which broader checks and balances are weak need to rely more heavily on more transparent and competitive systems.

The experience of certain high-performing East Asian economies also shows that meritocracy and long-term career rewards help build an esprit de corps, or a shared commitment to collective goals. This reduces the transactions costs of enforcing internal constraints and builds internal partnerships and loyalty.

In many countries civil servants’ wages have eroded as a result of expanding public employment lower skill levels and fiscal constraints on the total wage bill. The result has been a significant compress of the salary structure and highly uncompetitive pay for senior officials, making it difficult to recruit L retain capable staff. Some countries, such as Uganda, are undertaking far-reaching reforms to reduce overstaffing dramatically, increase average pay, and decompress the salary structure. But in ma countries these problems have yet to be addressed.

More Competition in the Provision of Public Goods and Services: In many developing co tries services are delivered badly or not at all. Politicians often intervene in the day-to-day operation sot public agencies, and managers have limited flexibility.

There are limited accountability tor results. And ill many countries the public sector has assumed a monopoly in delivery, eliminating pressures for belt performance.

Building an effective public sector in these circumstances will mean opening up core government institutions, to improve incentives in areas that the public sector has long monopolized.

Dozens o countries throughout the Americas, Europe, and Asia have capitalized on changes in technology an introduced competition in telecommunications and electric power generation. This has resulted in lower unit costs and a rapid expansion of service. Competition is also being enhanced by contracting out services through competitive bids and auctions.

This is a significant trend in industrial countries (the United Kingdom, Victoria State in Australia), but such mechanisms are also being used to improve efficiency in developing countries (for example, that of road maintenance in Brazil). Faced with weak administrative capacity, some countries (Bolivia, Uganda) are also contracting out the delivery of social services to nongovernmental organizations.

There is a growing trend to set up focused, performance-based public agencies with more clarity of purpose and greater managerial accountability for outputs or outcomes. New Zealand provides the most dramatic example among the high-income countries.

It broke up its conglomerate ministries into focused business units, headed by chief executives on fixed-term, output-based contracts with the a throaty to hire and fire and to bargain collectively. Singapore has long followed a broadly similar ap­proach with its performance-based statutory boards.

Other developing countries are following suit, with Jamaica, for example, establishing executive agencies along the lines of the British model.

But countries with inadequate controls and weak capacity need to proceed with caution. For these countries, giving public managers more flexibility will merely increase arbitrariness and corruption with no commensurate improvement in performance. And writing and enforcing contracts, particularly for complex outputs, require specialized skills that are scarce in many developing countries.

These coun­tries need first to strengthen rule-based compliance and financial accountability (as Argentina and Bolivia have done) within the public sector, provide greater clarity of purpose and task, and introduce performance measurement (as in Colombia, Mexico, and Uganda). As output measurement and ex post controls on inputs are strengthened, agencies can be provided more flexibility in exchange for their greater accountability for results.

Bringing the State Closer to People: Governments are more effective when they listen to busi­nesses and citizens and work in partnership with them in deciding and implementing policy where governments lack mechanisms to listen, they are not responsive to people’s interests, especially those of minorities and the poor, who usually strain to get their voices heard in the corridors of power. And even the best-intentioned government is unlikely to meet collective needs efficiently if it does not know what many of those needs are.

Giving People a Voice: Partnership involves bringing the voice of the poor and of marginalized groups into the very center of the policymaking process in many countries, voice is distributed as unequally as income greater information and transparency are vital for informed public debate and for increasing popular trust and confidence in the state-whether in discussing expenditure priorities, de­signing social assistance programs, or managing forests and other resources.

Client surveys (in India, Nicaragua, and Tanzania) and citizen charters (in Malaysia) are providing new options for making voices heard.

The best-established mechanism for giving citizens voice is the ballot box. In 1974 only thirty-nine countries-one in every four worldwide-were independent democracies. Today, 117 countries-nearly two of every three-use open elections to choose their leaders. But periodic voting does not always mean the state is more responsive.

Other mechanisms are needed to ensure that the concerns of minorities and the poor are reflected in public policies. Getting genuine intermediary organizations represented on policymaking councils is an important first step in articulating citizen interests in public policymaking.

Even more effective in local and provincial government, these organizations have recently become very active in developing countries-especially where the state has performed poorly and where such organizations are not suppressed.

Broadening Participation: Evidence is mounting that government programs work better when they seek the participation of potential users, and when they tap the community’s reservoir of social capital rather than work against it.

The benefits show up in smoother implementation, greater sustainability, and better feedback to government agencies. Higher returns from water-borne sanitation systems in Recife, Brazil; housing schemes for the poor in Port Elizabeth, South Africa; forest management efforts in Gujarat State, India; and healthcare in Khartoum, Sudan, are all testament to the power of partnership- -the participation of local people. This is in contrast with top-down approaches, which often fail.

In successful countries, policymaking has been embedded in consultative processes, which provide civil society, labor unions, and private firms opportunities for input and oversight. In East Asia public- private deliberation councils-such as Korea’s monthly export promotion meetings, Thailand’s National Joint Public and Private Consultative Committee, and the Malaysian Business Council-have provided mechanisms for feedback, information sharing, and coordination.

Devolving Power, Carefully: The typical developing country has a more centralized government than the typical industrial country but with some significant exceptions, the past thirty years have seen a small shift in public spending power in developing countries from the national to lower levels the industrial economies have seen an opposite trend, with spending power moving to the center neither of these observations, of course, takes into account the decentralization implicit in recent market reforms, which have clearly reduced the direct power and resources of central government in a broad range of countries.

Decentralization is bringing many benefits in China, India, much of Latin America, and many other parts of the world. It can improve the quality of government and the representation of local business and citizens’ interests. And competition among provinces, cities, and localities can spur the development of more-effective policies and programs. But there are three big pitfalls to watch out for:

» Rising inequality. The gap between regions can widen-an issue of considerable concern in China, Russia, and Brazil. Labor mobility provides a partial solution, but it is seldom easy, especially in ethnically diverse countries where migrants are not always welcome.

» Macroeconomic instability. Governments can lose control of macroeconomic policy if local and re­gional fiscal indiscipline leads to frequent bailouts from the center, as occurred in Brazil.

» Risk of local capture. A serious danger is that of local governments falling under the sway of special interests, leading to misuse of resources and of the coercive power of the state.

These dangers show, once again, how central government will always play a vital role in sustaining development. The challenge is to find the right division of labor between the center and the other tiers of government.

Building a more responsive state requires working on mechanisms that increase openness and transparency, increase incentives for participation in public affairs, and where appropriate, lessen the distance between government and the citizens and communities it is intended to serve. This yields four broad imperatives for policymakers:

» Where appropriate, ensure broad-based public discussion of key policy directions and priorities. At a minimum this includes making available information in the public interest and establishing consultative mechanisms–such as deliberation councils and citizen committees-to gather the views and m known the preferences of affected groups.

» Encourage, where feasible, the direct participation of users and other beneficiaries in the des’ implementation, and monitoring of local public goods and services.

» Where decentralization is considered desirable, adopt a carefully staged and/or sectoral approach) priority areas. Introduce strong monitoring mechanisms and make sure sound intergovernmental rules are in place to restrain arbitrary action at the central and the local level.

» At the local level, focus on mechanisms–and horizontal incentives in government’s relations with rest of the community-that build accountability and competition.

Of course, a strategy of more openness and greater decentralization has its dangers. The mo numerous the opportunities for participation, the greater the demands that will be made on the stat this can increase the risk of capture by vocal interest groups, or of gridlock. Bringing government closer to some people must not result in taking it even further away from others.

Equally, without clear cut rules to impose restraints on different tiers of government, and incentives to encourage local accountability, the crisis of governance that afflicts many centralized governments will simply be passing down to lower levels.

But there are some safe ways to start the ball rolling, including the use of communication and consensus building to render reform intelligible to citizens and firms and enhance its chances of success.

Globalization is a threat to weak or capriciously governed states. But it also opens the way for effective, disciplined states to foster development and economic well-being, and it sharpens the need for effect international cooperation in pursuit of global collective action.

Embracing External Competition:

The state still defines the policies and rules for those within its jurisdiction, but global events and international agreements are increasingly affecting its choices.

People are now more mobile, more educated, and better informed about conditions elsewhere. And involvement in the global economy tightens constraints on arbitrary state action, reduces the state’s ability to tax capital, and brings much closer financial market scrutiny of monetary and fiscal policies.

“Globalization” is not yet truly global-it has yet to touch a large chunk of the world economy. Roughly half of the developing world’s people have been left out of the much-discussed rise in the volume of international trade and capital flows since the early 1980s. Governments’ hesitance to open up to the world economy is partly understandable.

Joining the global economy, like devolving power from the center, carries risks as well as opportunities. For example, it can make countries more vulnerable to external price shocks or to large, destabilizing shifts in capital flows.

This makes the state’s role all the more critical; both in handling such shocks and in helping people and firms grasp the opportunities of the global marketplace. But the difficulties should not be exaggerated, particularly when laid against the risks of being left out of the globalization process altogether.

The cost of not opening up will be a widening gap in living standards between those countries that have integrated and those that remain outside. For lagging countries the route to higher incomes will lie in pursuing sound domestic policies and building the capability of the state.

Integration gives powerful support to such policies-and increases the benefits from them-but it cannot substitute for them.

In that sense, globalization begins at home. But multilateral institutions such as the World Trade Organization have an important role to play in providing countries with the incentive to make the leap.

Promoting Global Collective Action

Global integration also gives rise to demands for states to cooperate to combat international threats such as global warming. Economic, cultural, and other differences between countries can make such cooperation difficult-even, at times, impossible. But stronger cooperation is clearly needed for at least five major concerns that transcend national borders:

Managing regional crises:

The threat of nuclear war between the superpowers has given way to a mushrooming of smaller conflicts, entailing costly problems of refugee relief and rehabilitation.

No solid international framework exists for managing these conflicts or helping avoid them. A more integrated assessment of how state policies (and international assistance) help manage nascent conflict is needed in designing economic and social policy.

Promoting global economic stability:

Concern has been growing about the potentially destabiliz­ing effects of large and rapid flows of portfolio capital, particularly when a crisis in one country can spill over into other markets.

A variety of international mechanisms have been suggested to guard against such problems, and the International Monetary Fund has recently created a new facility to help members cope with sudden financial crises. But prudent and responsive economic policies at home will be countries’ best protection. Growing international labor mobility is also raising a host of issues requiring international collective action.

» Protecting the environment:

Urgent global environmental issues include climate change, loss of biodiversity, and protection of international waters. International collective action can help through better coordination, greater public awareness, more effective technological transfer, and better na­tional and local practices.

Progress has been slow, however, raising the worry that it will take a major environmental catastrophe to goad countries into concerted action.

» Fostering basic research and the production of knowledge:

Now being revitalized to meet re­newed challenges in food production, the Consultative Group on International Agricultural Research has shown how technology can be developed and disseminated through international collective action.

Similar consultative mechanisms need to be developed to tackle other pressing research problems in the domains of environmental protection and health.

» Making international development assistance more effective:

To become more effective, foreign aid needs to be tied more closely to the policies of the recipient countries. A high priority for aid agencies is to systematically channel resources to poor countries with good policies and a strong commitment to institutional reinvigoration.

Deep distributional conflicts and constraints embedded in state institutions are at the heart of the explanation for so many countries’ failure to reform. But they are not immutable. Ultimately, change comes when the incentives to throw out the old policies and old institutional arrangements become stronger than the incentives to keep them.

An economic crisis or an external threat, or the arrival of a new government with fewer vested interests in the old system, may provide the impetus for reform. But reform can be delayed if those in power stick with outdated policies because it is in their (or their allies’) interest to do so. And the delay can sometimes be painfully long, as in Haiti under the Duvaliers, or Zaire today.

Neighbors, too, can be a powerful motivator for change. There is a clear domino effect at work in the wave of reform sweeping East Asia, Latin America, and much of Eastern Europe and the former Soviet Union.

The threat being left behind can goad countries to improve the functioning of their bureaucracies. But research has yet to explain why some countries respond to crises and others do not. Why, for example, does popular tolerance of inflation seem to be much lower in Asia than in parts of Latin America? And why can some countries endure a long period of economic decline before responding, while others take action much sooner?

Often the analysis of winners and losers yields a prediction of when-or at least whether-reforms will be undertaken. Reforms have little appeal if the winners cannot compensate the losers even when the potential gains are enough to allow for compensation, reform can be hard to achieve because the gains are spread over many people, whereas the losers, although smaller in number, are powerful and articulate.

A further problem is that the benefits are often realized in the future, whereas the losses are immediate. Yet sometimes conditions have deteriorated so far that the winners far outnumber the losers. Then reform can produce immediate economic and political gains.

Reform-oriented political leaders and elites can speed reform by making decisions that widen people’s options, articulate the benefits clearly, and ensure that policies are more inclusive.

In recent years farsighted political leaders have transformed the options for their people through decisive reform. They were successful because they made the benefits of change clear to all, and built coalitions that gave greater voice to often-silent beneficiaries.

They also succeeded-and this is crucial-because they spelled out a longer-term vision for their society, allowing people to see beyond the immediate pain of adjustment. Effective leaders give their people a sense of owning the reforms-a sense that reform is not something imposed from without.

Reforming the state requires cooperation from all groups in society. Compensation of groups adversely affected by reform (which may not always be the poorest in society) can help secure their support. Although compensation may be costly in the short run, it will pay off in the long run. Deep- seated differences and mutual suspicions among groups can also delay reform.

There are no quick fixes for removing age-old enmities, but social pacts, such as Spain’s Moncloa Pacts and Benin’s National Economic Conference, can help.

International agencies can encourage and help sustain reform in four ways. First, they can provide important technical advice on what to do and what not to do. This assistance is often invaluable, especially for smaller states that lack the resources to handle all the technical issues internally. But it must be complemented by local expertise, to adapt reforms to local conditions and institutions.

The World Trade Organization plays a major role in trade reform, the World Health Organization on health issues, and the International Labour Organisation on labor legislation and employment policy. Second, international agencies can provide a wealth of cross-country experience on a wide range of issues. Often staffed by people from all over the world, they can bring in experts from different backgrounds.

Third, the financial assistance these agencies provide can help countries endure the early, painful period of reform until the benefits kick in. Fourth, they can provide a mechanism for countries to make external commitments, making it more difficult to backtrack on reforms. If the history of development assistance teaches anything, however, it is that external support can achieve little where the domestic will to reform is lacking.

The approach of the twenty-first century brings great promise of change and reason for hope. In a world of dizzying changes in markets, civil societies, and global forces, the state is under pressure to become more effective, but it is not yet adapting rapidly enough to keep pace.

Not surprisingly, there is no unique model for change, and reforms will often come slowly because they involve a fundamental rethinking of the roles of institutions and the interactions between citizens and government. But the issues raised in this Report are now an integral part of the rethinking of the state in many parts of the world and are on the agenda of the international organizations that assist them.

People living with ineffective states have long suffered the consequences in terms of postponed growth and social development. But an even bigger cost may now threaten states that postpone reforms: political and social unrest and, in some cases, disintegration, exacting a tremendous toll on stability productive capacity, and human life.

The enormous cost of state collapse has naturally turned attention to prevention as a preferable and potentially less costly course of action-but there are no shortcuts. Once the spiral into collapse has occurred, there are no quick fixes.

Instances of state collapse are both extreme and unique, but they are growing. As the Report elaborates, no simple generalizations about their causes or effects can be made, nor, for that matter are there any easy solutions to their reconstruction; each case brings its own challenges for countries, their neighbors, and the international system.

The consequences, however, are almost uniformly borne by ordinary people, illustrating once again how fundamental an effective, responsive state is to the long-term health and wealth of society.

The quest for a more effective state even in the established industrial countries suggests that the returns to incremental improvements are high.

This is especially true in countries where the effectiveness of the state is low. Over time, even the smallest increases in the capability of the state have been shown to make a vast difference to the quality of people’s lives, not least because reforms tend to produce their own virtuous circle.

Small improvements in the state’s effectiveness lead to higher standards of living, in turn paving the way for more reforms and further development.

A tour of the world’s economies in 1997 would turn up countless examples of these virtuous circles in action. But it would provide equally plentiful evidence of the reverse: countries and regions caught in vicious cycles of poverty and underdevelopment set in train by the chronic ineffectiveness of the state.

Such cycles can all too easily lead to social violence, crime, corruption, and instability, all of which undermine the state’s capacity to support development-or even to function at all.

The crucial challenge facing states is to take those steps, both small and large, toward better government that set economies on the upward path, using the two-part framework suggested in this Report.

Reform of state institutions is long, difficult, and politically sensitive. But if we now have a better sense of the size of the reform challenge, we are also much more aware of the costs of leaving things as they are.