Wednesday, April 16, 2008

Growth Strategies for the Developing Countries

Today I attended a very useful panel discussion on Economic Growth Strategies for Developing Countries in an Era of Global Uncertainty. The discussion focused less on the global uncertainty and more on how to propel growth and policy recommendations based on the experiences of China and India. Particularly amazing was the disagreement between Michael Spence and Lawrence Summers, who argued that the conclusions drawn by Spence and Mohamed A. El-Erian in a paper titled Growth Strategies and Dynamics: Insights from Country Experiences, a working paper series published by the Commission on Growth and Development, is biased towards the unconventional thinking in development economics.


The panel consisted of very well-known economists: Michael Spence (Nobel Laureate in Economics in 2001 and professor at Stanford University), Lawrence Summers (professor of economics at Harvard University), Robert Rubin (director and chairman of executive committee of the Citi Bank), Han Duck-soo (former Prime Minister of South Korea), Danny Leipziger (VP for Poverty Reduction and Economic Management, PREM at the World Bank), and Lael Brainard (VP and director of the Global Economy and Development Program and Chair in International Economics at the Brookings Institution). The event was organized by the Brookings Institution.

Spence presented the main findings of his paper. He argued that the advanced countries’ model of growth strategies is an incomplete guide but not worthless for the developing countries. He was arguing for the gradualism in growth strategies and polices as seen in China and to a lesser extent in India. Experimental approach is needed for successful navigation of growth strategies and policies, again as done by China. He also argued for the effectiveness of government intervention in key areas to bring coordination in economic activity. Governments should engage in vigorous policy debate with a definite end, i.e. policy wrangling is not enough, there should an end to policy debates and concrete action should follow such debate. Moreover, governments should admit and fix mistakes (especially ex-post determined).

He outlined key areas of policy debates with incomplete maps:

  • Speed of opening up the current account

  • Financial sector maturity and opening up of capital account...(see how Rodrik responds to this issue here)
  • Stimulate export diversification (lessen inefficiency and provision of transitory incentives)
  • Industrial policy (exchange rate and capital account management)
  • Surplus labor problems in the early stages of growth
  • Finding successful formula and doing it for too long
  • Protecting people and families during transition (creation/destruction during transition)

Spence was pretty much positive on all the points listed above. He also briefly talked about climate change and argued that we need to reduce per capital CO2 emission by a factor of 2. He was stressing more on the growth model of China and the experimental approaches to policy design.

Larry Lawrence Summers was not happy with the conclusion of the paper. He argued that he sensed trouble with three issues: (i) Methodology and policy recommendation, (ii) Cheap shot nature of growth strategies recommendation (not to be quick to pick up Chinese success and advocate its emulation in one or the other form. Remember, how WDR 1979 extolled Romanian growth model, which crumbled few years later...), and (iii) Belief in unconventional approaches...

Larry seems very much discontent with the way Spence recommended unconventional approaches followed by countries like China. He labeled the unconventional approach a “modern mercantilist approach” obsessed with export-led strategy, which Spence favors as a growth strategy in early stages, partly because of the existence of surplus labor in the agricultural sector in the developing countries. As Larry was arguing, the discussion was becoming intense (I think Larry felt he was being pounded hard when other panelist kind of agreed to Spence’s conclusion…Larry was showing strong discontent with the “cheap shot” approach of policy recommendation and the glorification of industrial policy). Anyway, he thinks there are three key problems with the unconventional approach recommended by Spence.

  1. How can an industrial policy differentiate whether one sector is better than the other? How sure are we that there is existence of labor surplus in the developing countries?...(wait Larry, please see Rodrik's paper Normalizing Industrial Policy... also see this one.)

  2. If all the developing countries try to subsidize exports (like South Korea, Mauritius, Malaysia) then who guarantees that the increased volume of goods would be bought? Who is going to be importer and will there be enough import demand?

  3. How capable is government to execute policy reform?

Larry argued that these questions are overlooked by the unconventional approaches, which overemphasize heterodoxy. He is very skeptical of local heterodoxy model followed by China and argued that those who derive quick conclusion on the effectiveness of heterodoxy looking at China are making arguments like Joe Stiglitz does! Larry was pretty much pissed by this time (quite visible from his white-turned-red face in just ten minutes!). Meanwhile, I was wondering why Larry is so pessimistic about import demand. Why does he think that whatever the developing countries produce has to be consumed by the West for the former to grow? South-South trade is already rising up at record level and if businesses concentrate more in serving the bottom billions, then there is huge demand, both domestic and import demand. I wonder why Larry does not consider the bottom billions as potential customers. See here how cell phones are already customized to tap the huge bottom billion market. Larry seems pretty much obsessed with the neoclassical approach, whose steadfast followers have gained little in the past five decades.

After Larry’s fiery discontent, Han Duck-soo came to Spence’s rescue. Being a PM of a country which had followed the unconventional approaches during the early stages of growth, Han argued that the world foreign demand of exportable goods is elastic and there is still scope for export-led growth strategies. He argued that South Korea tried to eliminate widespread distortions in the economy by harmonizing the activities of the private sector through an industrial policy. The businesses were competing with each other in an unhealthy fashion and there were a lot of distortions. All the government did was to reduce coordination failure, minimize information asymmetry, and maximize positive spillover effects in the economy. This is the unconventional approach Larry doubted. But he gave a caveat: there should be strong political leadership and effective government though. Moreover, an industrial policy can differentiate the best sector after looking at the constraints and harmonizing similar activities in the economy. The ingredients of growth are in an economy but not always in a good combination. They need to be harmonized through a good policy package. Spence and Han resonated the arguments usually argued by Rodrik (as far as I know!).

Then Robert Rubin argued that there is nothing wrong with export-led policy in the low income countries. However, the US should cope with the changes in the global economy and focus on distributional and social safety nets in the domestic market. Rubin argued that an effective government is itself an ingredient for growth. Also, he said that a relatively authoritarian government in the early stages of growth has been successful (South Korea, China, Malaysia). The biggest challenge now is: How to promote effective governance with a democratic system?

There was so much stuff going on in there. Unfortunately, I cannot summarize all of them. I will definitely go through the paper in the next couple of days and write a summary. The paper is highly recommended. Also, credit for the first picture goes to my friend Jehea Song, whose company and event pictures from her iphone I always enjoy!