Friday, August 29, 2008

Good stuff on growth economics

Here are some interesting stuff from Michael Spence's and El-Erian's paper titled "Growth Strategies and Dynamics: Insights from Country Experiences." I read the paper way back in April when it was first released during a panel discussion in DC. I went over the paper once again yesterday, reviewed it for my reference, and found these useful paragraphs.

...There is a certain amount of confusion in the literature with respect to informational gaps in the context of development. There are informational gaps and asymmetries (and related phenomena such as signaling, screening, and reputation building) throughout advanced economies in financial, labor, and other markets. These informational gaps are structural and do not disappear over time, absent regulation that alters the incentive structure with respect to disclosure. They also exist in developing economies, but they are fundamentally different from transitory informational gaps that tend to characterize new entrants to the global economy. The latter are not structural in the same sense, and they do decline over time with experience and normal informational spillovers. Domestic investors learn over time about the global economy and foreign investors learn about the domestic investment environment and institutions. The exception of course is when there is a blockage and relatively little interaction with the global economy. Under these conditions, incentives to jumpstart the process are appropriate.

Lessons from China's experience with growth:

China’s experience (and with variations India’s) sheds light on how to approach specific challenges that are inherent to a successful growth process. These include the pace and sequencing for liberalizing internal and external markets for goods and services, how and when and in what order to liberalize the capital account, management of the exchange rate, the role of industrial policy, overcoming the constraints imposed by a banking system riddled with NPLs and noncommercial operations, dealing with surges in capital inflows, and management of national financial wealth.

And, the ingredients in recipes that generate growth:

    1. Reliance on the market system for resource allocation (price signals, incentives, decentralization, and enough clarity of definition of property ownership to facilitate transactions and investment).
    2. A commitment to and intense focus on sustained growth and a government that acts in a manner that is representative of the interests of the citizens of the country. Persistence and determination are key ingredients as the process takes decades and involves inevitable bumps along the way. It is a multi-decade endeavor, somewhat akin to a long voyage (unique to each country in some respects), inevitably undertaken with incomplete and sometimes inaccurate charts and requiring midcourse adjustments, especially as the structure of the economy and the appropriate supporting policies shift significantly over time.
    3. Effective governance and leadership in building consensus behind policies designed to produce intertemporal improvements in the lives of citizens by choosing the right models and strategies for growth.
    4. Competent management of the macroeconomic environment in such a way as to promote domestic and foreign investment, including control of inflation and avoidance of policies that lead to damaging periods of very high inflation followed by growth-slowing policies needed to bring inflation down.
    5. High levels of saving and investment, especially public and private sector investment (in physical and social infrastructure, education, and health).
    6. Resource mobility, particularly labor mobility, combined with rapid creation of new productive employment and rapid movement of people from rural to urban centers. The result is rapid diversification and structural transformation of the economy.
    7. Leveraging the global economy to accelerate growth. This is the most important point of commonality and has two components: inbound transfer of knowledge and technology, and drawing on global demand to complement domestic components. The former rapidly increases the potential output of the economy, the latter permits much more rapid growth with exports as the driving force.

More on this topic here.