Wednesday, June 4, 2008

Wolf on Easterly's criticism of the Commission on Growth and Development's The Growth Report

Wolf says Easterly is kind of wrong in his assessment:

[...]Contrary to what Prof Easterly argues, the report makes useful contributions to policymakers’ understanding. The most important is the emphasis on growth itself, underplayed by many advisers and activists in the 1990s and early 2000s. Growth is not everything. But it is the foundation for everything. The poorer the country the more important growth becomes, partly because it is impossible to redistribute nothing and partly because higher incomes make a huge difference to the welfare of the poorest.

Yet the report goes beyond that. It is based on an analysis of 13 countries that have managed growth of 7 per cent a year over at least 25 years. They are diverse: Botswana, Brazil, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Malta, Oman, Singapore, Taiwan and Thailand. India and Vietnam seem likely to join this group. These countries have not all sustained their growth: Brazil and Indonesia are important examples of backsliding. These countries are also different in many respects, notably in their size, resources and culture.

Yet, suggests the report, they shared five points of resemblance: they fully exploited the opportunities afforded by the world economy; they maintained macroeconomic stability; they sustained high rates of saving and investment; they let markets allocate resources; and they had committed, credible and capable governments.

These points are consistent with the so-called “Washington consensus” of the 1990s, which emphasised macroeconomic stability, trade and the market. Yet the report’s emphasis is different: it does not stress privatisation, free markets and free trade, while it does emphasise the role of the so-called “developmental state”

Beyond these principles, the report proposes “ingredients” of rapid growth. It says: “Just as we cannot say this list is sufficient, we cannot say for sure that all the ingredients are necessary. . . But we suspect that over 10 or 20 years of fast growth, all of these ingredients will matter.”

The ingredients include: investment of at least 25 per cent of gross domestic product, predominantly financed by domestic savings, including investment of some 5-7 per cent of GDP in infrastructure; and spending by private and public sectors of another 7-8 per cent of GDP on education, training and health. They also include: inward technology transfer, facilitated by exploitation of opportunities for trade and inward foreign direct investment; acceptance of competition, structural change and urbanisation; competitive labour markets, at least at the margin; the need to bring environmental protection into development from the beginning; and equality of opportunity, particularly for women.

The report also offers a pragmatic guide to some controversial debates: the role of industrial policy and export promotion; the pros and cons of deliberate undervaluation of the exchange rate; how far and how soon the economy should be open to capital flows; and the difficulties inherent in developing the financial sector.


Particularly welcome is the short list of policies to be avoided. Among them are: subsidising energy (particularly relevant today); using the civil service as employer of last resort; reducing fiscal deficits by cutting spending on infrastructure; providing open-ended protection to specific sectors; using price controls as a way to curb inflation; banning exports, to keep domestic prices low; underinvesting in urban infrastructure; underpaying public servants, such as teachers; and allowing the exchange rate to appreciate too far, too quickly.

This report, then, should be seen as a pragmatic guide to policies for accelerating growth in developing countries. What emerges is how tricky this has proved to be: it notes, rightly, how often growth has slowed once a country has achieved middle-income status. This is partly because policies and politics will, and must, change as the economy evolves.

Achieving sustained, rapid growth turns out to be very hard. Recognition of this is no objection to the report’s conclusion. It is an admission of how little we know about such a complex economic, social and political process. Yes, the report is humble. There is much for economists to be humble about. But humility should not be mistaken for total ignorance.