Monday, September 5, 2011

Can there be convergence between developed and developing countries?

The question addressed in this paper is whether the gap in performance between the developed and developing worlds can continue, and in particular, whether developing nations can sustain the rapid growth they have experienced of late. The good news is that growth in the developing world should depend not on growth in the advanced economies themselves, but on the difference in the productivity levels of the two groups of countries – on the “convergence gap” – which remains quite large. Yet much of this convergence potential is likely to go to waste. Convergence is anything but automatic, and depends on sustaining rapid structural change in the direction of tradables such as manufacturing and modern services. The policies that successful countries have used to achieve this are hard to emulate. Moreover, these policies – such as currency undervaluation and industrial policies – will meet greater resistance on the part of industrial countries struggling with stagnant economies and high unemployment.

Here is the full paper by Dani Rodrik. Convergence depends on bridging the productivity levels/gap. And exploiting it needs sustaining rapid structural change in the direction of tradables such as manufacturing and modern services.

Public investment efficiency in developing countries

Dabla-Norris et al. (2011) construct Public Investment Management Index (PIMI) that benchmarks the quality and efficiency of the investment process across 71 developing and emerging countries.

According to their findings, the 5 countries with the most efficient investment processes are middle-income (South Africa, Brazil, Colombia, Tunisia and Thailand), and the weakest performers (Belize, Congo-Brazzaville, Solomon Islands, Yemen, and the West Bank and Gaza).

More on the index here

Country efforts to “invest in the investment process” encompasses several aspects or stages – country capacity to carry out technically sound and non-politicised project appraisal and selection, appropriate mechanisms for implementation, oversight, and monitoring of investment projects, and ex post evaluation. We create sub-indices that aggregate indicators across these four stages of the investment process: project appraisal, selection, implementation, and evaluation. The first stage, project appraisal, ensures investments are chosen based on development policy priorities. The second stage captures the extent to which project selection is linked to the budget cycle – country experiences find opaque organisational arrangements result in chronic under-execution of investment budgets, rent seeking, and corruption. Project implementation covers a range of aspects, from timely budget execution and efficient procurement to sound internal budgetary monitoring and control. The last stage, ex post evaluation of projects compares the project’s costs with those established during project design.

We scored countries on each of the stages (each of the stages is made up of several individual components, 17 in total). The different components were scored and combined to construct the overall PIMI. A scale between 0 and 4 was used for each question (most data is qualitative), with a higher score reflecting better public investment management performance.

[…] In the current environment of abundant liquidity and search for yield, and the growing importance of BRICs as sources of foreign direct investment and aid, low-income countries have access to financing like never before. It will be important that they leverage it to close the infrastructure gap and increase growth. "Investing in the investment process" will ensure that the much-needed scaling-up of investment leads to future sustained prosperity rather than roads and bridges that lead to nowhere.