Tuesday, April 27, 2010

Ten bad ideas for economic growth

It comes from a recent report about post-crisis growth and developing countries by the Growth Commission. The set of bad ideas for growth are:

  1. Assuming the crisis is a “mean-reverting” event and the we will return to a pre-crisis pattern of growth, capital costs, trade and capital flows.
  2. Interpret the need for better regulation and government oversight of the financial sector as a reason for micromanagement of the financial sector.
  3. Abandon the outward-looking, market-driven growth strategy because of financial failures in the advanced countries.
  4. Allow medium-term worries about the public debt to inhibit a short-term fiscal response to the crisis.
  5. Adopt counter-cyclical fiscal policies without concern for the returns on public spending, and without a plan to restore the public finances to a sustainable path over time, once the crisis is past.
  6. Ignore the need for more equitable distribution of gains and losses in periods of prosperity as well as in crisis.
  7. Continue with energy subsidies on the assumption that commodity prices will not rebound after the crisis.
  8. Treat the financial industry like any other, ignoring its external effects on the rest of the economy.
  9. Focus monetary policy on “flow” variables like inflation, job creation and growth, ignoring potential sources of instability from the balance sheet (asset prices, leverage, derivates exposure).
  10. Buy assets whose risk characteristics are hard to understand. The high returns are likely to reflect higher risk even though the latter may be hidden from view. They will be overpriced and salable, if at all, in a crisis only at distressed prices. Things that seem too good to be true, probably are.

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