Monday, April 28, 2008

Good reform teams led growth

A new paper (Reform Teams) from the Commission on Growth and Development explores how keeping an arm's length relation with the private sector, through careful planning by reform teams/experts, helped Botswana, Japan, Taiwan, Cape Verde, Mauritius, and Malaysia attain astounding growth rates and reduction in poverty levels. It explains the virtues of experts/reform teams led growth and how they can help developing countries grow and reduce poverty levels. Before enjoying the juicy explanation in the paper, we need to be clear that the countries that are chosen as success examples in this paper carried out the reforms well before the WTO regime's harsh conditions on SEZs and import-substitutions policies were in place, which essentially allowed them to engage in export-led growth strongly supported by the state. This is exactly the theme of earlier paper written by Nobel laureate Michael Spence and Mohamed A. El-Erian. Almost all the stuff that is coming out of the CGD recommends countries to learn from the experiences of China and India. See this discussion as well.

Anyway, the paper outlines six functions of reform teams/experts:

  1. Designing development strategies
  2. Leading the dialogue with the private sector
  3. Grooming political leaders
  4. Leading critical policy negotiations
  5. Mobilizing and allocating resources
  6. Compelling the administration to act

...How did these reformers organize themselves at the beginning of their development journey? A recent study examined that question by focusing on five cases—Botswana, Cape Verde, Malaysia, Mauritius, and Taiwan (China)—chosen because of their varied cultural and administrative heritages (ranging from strong autocratic governments to weak multiparty coalitions). These economies achieved remarkable performance despite dire starting conditions. Botswana was the poorest country in the world in 1966, with only 22 university graduates and 12 kilometers of paved roads. Mauritius had an economy that depended almost exclusively on sugar and was prone to violence in the decade before independence in 1968. Cape Verde had virtually no private sector and among the world’s worst human development indicators in 1975.

...Malaysia’s team was its Economic Planning Unit, which reported directly to the prime minister. The unit started in the early 1960s with 15 staff, half of whom were expatriates. Cape Verde relied on three returnee advisers around the prime minister (who was also the minister of planning and development assistance) in 1975. Botswana also had an Economic Planning Unit, which started in 1965 with two economists and soon became the core of the powerful Ministry of Finance and Development Planning. Taiwan (China) had the Council for U.S. Aid (created in 1948), which reported directly to the president and combined some of the economy’s best engineering minds with top-notch U.S. economists.

Other star performers followed a similar approach—with Singapore relying on its Economic Development Board, Chile on its “Chicago boys,” the Republic of Korea on its Economic Planning Board, and Japan on its Ministry of Trade and Industry.

...The reform teams identified key constraints and success factors by industry, such as ensuring good governance in mining and developing best practice export processing zones for light manufacturing and information and communication technology. They also adapted the strategies to changing conditions (such as rising labor costs) and terminated bad experiments (Taiwan, China, is one of the few economies ever to abandon an ailing automotive assembly industry).

All the economic planning units that the paper mentions relied on a carefully planned industrial policy designed to reduce coordination failures, bridge informational gaps and asymmetries, and reduce negative spillover effects. One strong point that can be inferred from this paper is: You need to have a carefully planned industrial policy!