Wednesday, August 28, 2013

Economic growth and its determinants in the future

Dani Rodrik, in a new working paper titled The Past, Present, and Future of Economic Growth, argues that economic growth in the future hinges on (i) stable macroeconomic framework; (ii) economic restructuring and diversification; (iii) social protection; (iv) investment in human capital and skills;and (v) regulatory, legal and political institutions.

Excerpts from the paper below:

The future of growth is unlikely to look like its recent past. It may well be that the six decades after the end of World War II will prove to have been a very special period, an experience not replicated before or after. The rate of convergence between poor and rich countries is likely to fall considerably from the levels seen during the last two decades. Developing countries will probably still grow faster than advanced economies, but they will do so in large part because of the slowdown in growth in the advanced economies.

Ultimately, growth depends primarily on what happens at home. Even if the world economy provides more headwinds than tailwinds, desirable policies will continue to share features that have served successful countries well in the past. These features include a stable macroeconomic framework; incentives for economic restructuring and diversification (both market led and government provided); social policies to address inequality and exclusion; continued investments in human capital and skills; and a strengthening of regulatory, legal, and political institutions over time. Countries that do their homework along these dimensions will do better than those that do not.

Beyond these generalities, however, the main policy implication is that future growth strategies will need to differ from the strategies of the past in their emphasis, if not their main outlines. In particular, reliance on domestic (or in certain cases regional) markets and resources will need to substitute at the margin for reliance on foreign markets, foreign finance, and foreign investment. The upgrading of the home market will in turn necessitate greater emphasis on income distribution and the health of the middle class as part and parcel of a growth strategy. In other words, social policy and growth strategy will become complements to a much greater extent.