Commission on Growth & Development Report: Fast, sustained growth is not a miracle – it is possible for developing countries, as long as their leaders are committed to achieving it and take advantage of the opportunities provided by the global economy. Developing countries also need to know the levels of incentives and public investments that are needed for private investment to take off in a manner that leads to the long term diversification of the economy and integration into the global economy.
Dr. Michael Spence, a winner of the 2001 Nobel Prize in Economics and chairman of the Commission on Growth and Development, says that sustained high growth in developing economies is a recent, post-World War II phenomenon. Using GDP figures, "high" is above 7% and "sustained" is over 25 years or more. He says that these cutoffs are arbitrary, but a similar picture emerges with variants. Growth at these rates produces very substantial changes in incomes and wealth: Income doubles every decade at 7%.
There are 13 such cases of sustained high growth, and nine are in Asia. These are Botswana, Brazil, China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan (China), and Thailand.
Each and every one of these miracles had an export sector as a driver of growth and an increasing share of trade in GDP. There are no exceptions. Every growth miracle involves leveraging the demand and resources of the global economy.
These are among the key findings of the Commission on Growth & Development’s report:The Growth Report: Strategies for Sustained Growth and Inclusive Development (10 MB pdf), launched this week; “At a time when industrialized countries are experiencing a sharp slowdown in growth, many of the world’s poorest countries have found growth to be elusive. It is our belief, however, that sustained, high growth can be explained and repeated,” says Dr. Spence.
“By bringing together (on the Commission) the economists and the policy makers who have had to make the hard decisions for their economies, the Growth Report provides a decision-making framework for achieving inclusive, high growth.” ‘The Growth Report’ identifies some of the distinctive characteristics of high-growth economies and asks how other developing countries can emulate them.
Spence argues: “The Growth Report also kills off once and for all the misguided notion that you can lift people out of poverty in the absence of growth. Growth can spare people en masse from poverty and drudgery. And with India needing to grow at a fast pace for another 13-15 years to catch up to where China is today, and China having another 600 million people in agriculture yet to move into more productive employment in urban areas, growth will lift many more people out of poverty in the coming decades.”
The Commission is the result of two years work on the requirements for sustained and inclusive growth in developing countries led by 19 experienced policymakers and two Nobel prize-winning economists. Its work has been supported by the Governments of Australia, Sweden, the Netherlands, and United Kingdom, the William and Flora Hewlett Foundation, and the World Bank Group.
The Report notes the current threat posed by rising food prices, calling for prompt action to protect poorer people from price increases, and warning that malnutrition and reduced incomes will reduce long-term growth prospects.
Actions recommended by the Report to combat food price rises (once the current emergency situation is dealt with) include an end to export bans; more effective safety nets and redistribution mechanisms to protect people vulnerable from sudden shifts in prices; and a revitalization of infrastructure investment for agriculture. The Report also urges that policies that favour bio fuels over food be reviewed and, if necessary, reversed and that reserves and inventories be accumulated to relieve temporary shortages.
- There are 13 countries that experienced sustained high growth--defined as 7% per year or more for 25 years or longer, post WW II
- Botswana, Brazil, China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan (China), and Thailand
- India and Vietnam are close because of growth accelerations in the past 10-15 years
- There may be others because of recent growth accelerations (in part due to upward shift in the relative price of energy, commodities and food. Demand induced).
–These initial growth accelerations can be transformed into sustainable growth dynamics: rapid employment creation and structural diversification
In addition, the Report calls for establishing a mechanism to coordinate the policies of the growing number of influential countries and to safeguard the stability of the global financial system.
Given the increasing economic importance of new global players, the document argues for a rebalancing of global responsibilities and representation.
Just as the current credit crunch is affecting advanced economies, the Report also stresses the importance of a strong financial system in developing countries and argues for careful supervision of the banking sector to prevent banks expanding credit too far, and the removal of capital controls only in step with the financial market’s maturity.
Other key conclusions of the Report include:
--That growth is a crucial part of poverty reduction and the improvement of people’s lives. It is impossible for poor countries to lift large populations out of poverty without growth. Equality of opportunity and a focus on individuals and families, gender inequalities, and economic security, however, is critical to maintaining the support for growth oriented policies.
-- That growth is a long-term challenge that requires leadership, persistence, stamina, pragmatism, transparency and the support of the population.
-- That growth requires engagement with the global economy to import knowledge and technology, to access markets, and to generate a strong export sector – critical in the early stages of growth.
|Growth and Poverty Reduction
- Growth is a necessary condition for poverty reduction in poor countries
- It is arithmetically impossible to reduce poverty through redistribution in countries where the average income is below 700 dollars a day
- The high growth cases all exhibit rapid poverty reduction
- Sustained high growth requires rapid incremental productive employment
–Tends to be inclusive and contributes to poverty reduction
- “Shocks”for most people are emergencies for the poor
–Current food emergency
–Policy focus has to be dealing with the emergency rather than adapting to the cause of the shock
–Similar problem for the poor in adaptation to climate change
–Poverty reduction increases adaptability to shocks
-- That growth must be inclusive. The Report highlights the importance of sharing the benefits of globalization, providing access to the undeserved, and dealing with issues of gender inclusiveness. It notes the importance of infant and childhood nutrition to avoid long-term impairment in acquiring cognitive and non-cognitive skills, ensuring that they derive greater benefit from the education system and become more effective in the workplace.
-- That resources, especially labor, must be mobile. The Report also recommends a bridging of the divide between the formal and informal labor sectors by allowing export-oriented industries to recruit workers on easier terms than prevail in the formal sector but with the same essential worker protection in the areas of health and safety, working hours and child labor. It highlights the need to better manage the migration challenge and the results of changing demographics.
-- That growth requires high rates of investment, with the Report suggesting that overall public and private sector investment rates of 25 percent of GDP or above are needed.
-- That investment in education and health are particularly important. The Commission also calls for greater research into the measurement of students’ abilities in literacy and numeracy, and increased opportunities for women in the education system.
-- That money spent subsidizing energy consumption in developing countries is often misspent. Better to invest the resources in education and infrastructure. In addition subsidies bias the capital investment in long-lived assets away from energy efficiency and may negatively bias the structural evolution of the economy, the Report says.
Finally, the Report says that mid-century environmental mitigation targets are impractical, with 10-15 year time spans more feasible so that the true cost of mitigation can be calculated. The report also recognizes that developed countries are the globe’s largest per capita emitters of carbon, and it rejects calls for emerging economies to shoulder the full cost of mitigation until their per capita incomes approach advanced country levels.
|Commodity Prices and Growth
- Energy, food and minerals
- Rapidly rising global demand
–30 years ago there were 1 billion people (<20% of world’s population) in advanced or rapidly growing countries
–Today that number is close to 4 billion and rising (approaching two thirds of the world’s population)
- Food prices
–Opportunity for many countries
–Supply response likely to be large (demand elasticity is low)
- Energy prices
–Have the capacity to slow global growth
–Supply elasticity depends on whether one includes alternatives
–Demand elasticity likely to be very high
–Longer term dependent on technology
- Relative price volatility likely to be a recurring feature of the global economy
According to Michael Spence:“Growth requires leadership, persistence and engagement with the global economy. It also requires advanced economies to play their part as well – bringing an end to the current focus on energy subsidies and bio fuels and an end to protectionist policies which limit developing world access to the global markets that are so central to growth.”
Professor Robert Solow, Nobel Laureate and fellow Commissioner observed that “The evidence in our work pointed to a number of findings: That competition is absolutely essential at every stage of economic development, that access to world markets is very much a lesson for the rich countries as it is for developing countries, and that the more equitable the growth, the more sustainable it’s likely to be. Leadership and governance can only work when it is supported by wide parts of the population.”
The report says that leadership requires patience and a long planning horizon. In several cases, fast-growing economies were overseen by a single-party government that could expect to remain in power for decades to come. In a multiparty democracy, on the other hand, governments typically look no further than the next election. But democracies can nonetheless preside over remarkable passages of growth. Today’s India is the most prominent example. But Ireland and Australia also provide some instructive lessons.
Australia’s Productivity Commission was established by an act of parliament in 1998, although it can trace its roots back 30 years. An independent state agency, it regularly evaluates government regulations and microeconomic policies, analyzes Australia’s long-term growth prospects, and helps bring people together to craft proposals for reform. The Irish Social Partnership, which arose out of the country’s economic stagnation in the 1980s, brings employers, unions and the government together every three years to rethink and renegotiate the nation’s economic strategy. Once these deliberations are ratified, they be come the framework for policymaking for the next three years.
The report says that these latter cases show that democracies can be surprisingly far-sighted. Rival political parties can, for example, agree on a bipartisan growth strategy, which they each promise to follow when it is their turn in power. Even if a formal pact is never made, a successful growth strategy, commanding the confidence of the public, may outlast the government that introduced it.
The Growth Report recognizes that countries are not homogenous and one set of policies will not work everywhere. Nevertheless, it highlights focus areas for four sets of countries:African countries, small states, resource-rich countries, and middle income countries where growth has stalled.
-- That industrialized countries finance the expansion of Africa’s tertiary education to make up for Africa’s brain drain. The report also recommends that industrialized economies implement promptly the time-bound trade preferences granted to manufactured exports from African countries to help them overcome the disadvantages of being late starters.
-- In small states, the Growth Report recommends greater regional economic integration, and a spreading of the burden of public services, through partial union, helping reduce the high per capita costs of effective government. Good governance is also an important foundation on which regional cooperation and multinational integration can build, the Report says.
-- Better governance in resource-rich countries, and more balance and transparency between the returns to the entities exploiting the resources and the governments in resource-rich countries.
-- And increased investment in higher education and innovation as economies transition from middle income to high income status.
The Commission’s Vice-Chair, Danny Leipziger, added: “We are acutely aware that there are no silver-bullets to create long running, inclusive growth, and that no single paradigm exists. Nevertheless, the Commission has sought to identify those indispensable elements that need, as Professor Solow has said, to form the ingredients of the growth recipe underlying inclusive development.”
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