This report is the fourteenth in an annual series assessing major development issues. This report synthesizes and interprets the lessons of more than forty years of development experience. Together with last year's report on poverty and next year's on the environment, it seeks to provide a comprehensive overview of the development agenda. The 1990s began with dramatic changes, as many countries in Eastern Europe and elsewhere initiated ambitious reforms of their economic and political systems. Against the backdrop of these transitions, this report links the historical debates that counseled policymakers in their past decisions, the lessons of experience, and the evolving thought on how best to proceed. One of the most valuable lessons relates to the interaction between the state and the market in fostering development. It describes a market-friendly approach in which governments allow markets to function well, and in which governments concentrate their interventions on areas in which markets prove inadequate. The report looks at four main aspects of the relationship between governments and markets: (a) investing in people; (b) the climate for enterprises to flourish; (c) the integration of countries with the global economy; and (d) a stable macroeconomic foundation for sustained progress. The report stresses that, above all, the future of developing countries is in their own hands. Domestic policies and institutions hold the key to successful development.