Commission favours growth

Monday June 16

A recent report by the Commission on Growth and Development has found that countries that succeed in producing sustained periods of economic growth are almost certain to see reductions in poverty levels and wider human development.  The report, which strongly favours orthodox economic policies, comes at a time when policymakers and general publics are increasingly sceptical about the benefits of economic globalisation.

The report focuses on the 13 countries that, from 1950-2005, enjoyed average annual economic growth rates of 7% or more for periods of at least 30 years.  These countries were found to have shared five broad characteristics during high-growth periods:

• Globalised economies. Integration into the global economy facilitates not only trade, but also inward transfers of technology and knowledge from abroad, which enable developing countries to catch up economically with developed countries. Foreign direct investment is a major vehicle for these transfers, but so is foreign education and foreign networking by nationals. The report emphasises that growth strategies focused on domestic demand will eventually face limitations that can be avoided by globally focused growth strategies.

• Stability. Avoidance of macroeconomic fluctuations is critical. Sustained high economic growth requires long-term policies, which engender long-term saving and investment decisions. Macroeconomic fluctuations render this more difficult.

• Saving and investment. High savings and investment rates sustain economic growth: the report identifies a national (public plus private) saving rate of 20-25% as consistent with sustained high economic growth. Although foreign capital could contribute some of the amount required, the 13 countries' experiences show that domestic saving is a more important driver.

• Free markets. The report is unambiguous in its support of free markets. No other system has succeeded in generating sustained high economic growth. Liberalising product markets generates competition, and liberalising labour markets creates conditions for workers to move among firms -- a key component (alongside training and education) of protecting people rather than jobs, companies or sectors.

• Good leadership. Sound economic frameworks are unlikely to generate sustained economic growth in the long term unless well-functioning and visionary governments maintain and drive them. These need not necessarily be democratic; from the perspective of sustaining long-term economic growth, critical elements are strategy and communication, credibility and inclusion.

However, the report concludes that, while it may be possible to prescribe 'ingredients' for sustained long-term growth in developing countries, each country will require a different combination of those ingredients.

The report may also generate controversy as it praises the long-term economic policy-making successes of some non-democratic regimes.  For example, it highlights China’s vision and strategic planning, strong economic leadership and corresponding policy stability.  At the same time, arguably less weight is accorded to the potential economic drawbacks of such regimes -- such as their propensity to implement inappropriate growth strategies.