Growth Strategies and Dynamics in Developing Countries Michael Spence Hamilton Project/CGD Forum Washington D.C. April 14, 2008 1
The Focus The subject is sustained high inclusive growth and the policies, investment, leadership and political underpinnings that support it. Sustained means over several decades Inclusive is meant to capture more than income: opportunity, productive employment, access to services Primary goal: provide a framework for political and policy leaders in developing countries with responsibility for strategies and policies for growth We understand (and are explicit) that growth is not the end goal but a means to several ends: poverty reduction, human development, health, the opportunity to work productively and to be creative 2
Sustained Growth Dynamics 12 cases of sustained high growth (7% or more for 25 years of more) Botswana; China; China, Hong Kong, SAR; Indonesia; Japan; Korea; Malaysia; Malta; Oman; Singapore; Taiwan, China; and Thailand India and Vietnam are close because of growth accelerations in the past 10-15 years There may be others because of recent growth accelerations (in part due to upward shift in the relative price of energy, commodities and food). The jury is out on whether these initial growth accelerations will be transformed into sustainable growth dynamics: rapid employment creation and structural diversification 3
Common Characteristics Engaging and leveraging the global economy: demand and knowledge Market incentives and decentralization High levels (and effectiveness) of savings and investment Rapid diversification and incremental productive employment Structural transformation: creation and destruction Resource mobility especially labor across sectors and geography Rapid urbanization Stable and functional investment environment 4
Sustained Growth Time Horizons GROWTH DYNAMICS: TRANSITIONS IN YEARS AS A FUNCTION OF THE GROWTH RATE YEARS 400 300 200 100 0 1 3 5 7 9 POOR TO ADVANCED POOR TO MIDDLE INCOME GROWTH RATE % 5
China: GDP per capita and Poverty Reduction 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1970 1980 1990 2000 2010 REAL GDP PER CAPITA REAL GDP PER WORKER 80 70 60 50 40 30 20 10 0 POVERTY IN PERCENTAGES 1960 1970 1980 1990 2000 $ $ 6
GDP per capita: China and India (constant 2000 US$) 1600 1400 1200 1000 800 600 400 200 0 India GDP per capita (constant 2000 US$) China GDP per capita (constant 2000 US$) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 7
Saving and Investment Savings and Investment in India and China 45 40 35 30 25 20 15 10 5 0 1980 1984 1988 1992 1996 2000 2004 Investment Rate (% of GDP) India Savings Rate (% of GD) India Gross capital formation (% of GDP) China Gross savings (% of GDP) China 8
Leveraging the Global Economy Trade in Relation to GDP China 70 60 50 40 30 20 10 0 China NE.IMP.GNFS.ZS Imports of goods and services (% of GDP) China NE.EXP.GNFS.ZS Exports of goods and services (% of GDP) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 9
Trade in Relation to GDP India Trade in Relation to GDP India 45 45 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 0 Imports % o f GDP India Imports % o f GDP India Exports % of GDP India Exports % of GDP India 10 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
4.00 2.00 0.00 Income Inequality China: Total Growth and Growth Rate: Per Capita Income: 1995-2004 16.00 12.00 8.00 4.00 0.00 Growth Income per capital Bottom 5% Bottom 10% Low Lower Middle Middle Upper Middle High Top 10% Growth Rate Growth Factor 11
Sustained High Growth is Difficult to Achieve Some of the literature gives the impression that it is after all pretty easy to increase the long-run growth rate. Just reduce a tax on capital here or eliminate an inefficient regulation there, and the reward is fabulous, a higher growth rate forever, which is surely more valuable than any lingering bleeding-heart reservations about the policy itself. But in real life it is very hard to move the permanent growth rate; and when it happens, as perhaps in the USA in the later 1990s, the source can be a bit mysterious even after the fact. (Bob Solow, 2007, OREP) 12
Necessary and Sufficient Conditions A this stage of our understanding of economic development, no one knows with a sufficient degree of conviction, the necessary and sufficient conditions for growth. It would be preferable if it were otherwise. Decision-making with incomplete model of the responses of economy to policy choices As economy and its institutions develops and matures, its responses change and become more like advanced countries Learning about a moving target 13
A Central Question What do leaders and governments need to do increase the likelihood of setting these dynamics in motion? 14
Leadership and Politics Strategy and some vision about where this is all leading Long time horizons Communication Compacts with stakeholders Values Inclusiveness Clarity about the intended beneficiaries and the objective Managing political transitions Navigation with imperfect and sometimes inaccurate maps 15
Successful Navigation Recognition that advanced country model is incomplete guide Especially in the early stages of growth Skepticism of theory and orthodoxies Avoidance of paralysis in the face of uncertain responses Usefulness of similar cases as a partial guide Gradualism or step by step approach As a risk mitigation strategy Caution in policy shifts but rapid implementation Experimental approach to policy and reform Need to truncate failed experiments promptly Expand successful ones quickly Clarity and unwavering attention on the goal Persistence, patience and a very ling time horizon Need to sustain focus through political transitions 16
Government Effectiveness Policy formulation and priority setting Attracting top flight talent Support an environment of vigorous policy debate Whether the debate is externally visible and accessible to outsiders varies a lot from case to case But not endlessly Capacity to act and implement Anticipate mistakes (viewed ex post) Admit and fix 17
Policy Areas With Incomplete Maps Speed of opening up on the current account Maintaining reasonable balance between rate of job creation and job destruction Financial sector maturity and openness on the capital account Stimulating export diversification With minimal inefficiency, waste and risk of capture Incentives that are explicitly transitory The exchange rate and capital account opening as industrial policy tools The surplus labor problem in the early stages Finding a successful formula and doing it for too long Structural transformation is continuous and very little is permanent Protecting people and families (not sectors, firms and jobs on a permanent basis) in the destruction part of creative/destruction, that is in the transitions 18
Climate Change and Global Warming Similar decision-making structure Time horizon: on the order of 50 years Sequential decision making with high initial uncertainty, learning along the way, and a moving target with respect to mitigation costs and options as a result of technology Uncertainty in several areas Science: ranges are high for given levels of stock of CO2 in atmosphere Costs: By source Efficient pattern of mitigation across countries Time path of cost reduction Response: take actions that reduce mitigation costs and generate the maximum amount of useful information, to inform the next round of decision making 19
Tons per year 25 CO2 EMISSIONS PER CAPITA 20 15 10 5 0 20 World Safe Level United States Canada Russian Federation United Kingdom Germany Netherlands Italy Spain France China Egypt Brazil Vietnam India Nigeria Bangladesh Tanzania Ethiopia
The Global Context Key External Influences on Developing Country Options Doha success Financial Stability and Governance Responsive climate change strategy that accommodates growth Internationally supervised migration for work Focus on equity and risk mitigation internally and also in advanced countries Voice in evolving global governance 21