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The old paradigm “stabilize, liberalize, and privatize” no longer works as a general prescription for sustained growth in developing countries, according to Danny Leipziger, vice president for poverty reduction and economic management at the World Bank.
In fact, a recent independent report recommends moving away from a “single silver bullet” approach to economic growth, Leipziger said at the Myron Scholes Global Markets Forum hosted by the Initiative on Global Markets September 26 at Gleacher Center.
Instead, “The Growth Report: Strategies for Sustained Growth and Inclusive Development” makes several recommendations:
The report was compiled by the independent 21-member Commission on Growth and Development, which relied on members’ practical experience as policy makers and numerous background working papers, said Leipziger, commission vice chairman The report is important because in the 1990s, “many development agencies, including my own, had lost economic growth as one of their main objectives,” and it is hard for a country to reduce poverty without sustained high levels of growth, he said.
The commission looked at developing countries that grew at least 7 percent a year for at least 25 years. Only 13 countries met that characteristic.
“We make a strong case that for high and sustained growth levels in developing countries, investment in infrastructure is a key priority,” Leipziger said. Infrastructure demands will be “enormous,” as 95 percent of the new poor will live in urban areas.
In light of rising food and fuel costs, however, such investments usually suffer first. “Talking about long-term growth at a time when everyone’s worried about short-term shocks is, as they would say in Spanish, inconvenient,” Leipziger said.
Governments end up bearing the costs of support, because organizations like the International Monetary Fund are failing to supply funds to deal with the shocks and donors are “neither predictable nor flexible,” he said. “At the end of the day, I think stressed governments will cut back on investment. For purposes of long-term growth, that is not the right answer.”
Among those who offered their opinions of the report were, Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance, and Abhijit Banerjee, economics professor at MIT.
Rajan said the report could have provided greater detail and “a much louder call for action on international co-operation.” Emerging markets have a “lack of appetite” for listening to external advice from international agencies unless developed countries make some nod to international co-operation also, he said. “Will industrial countries subject their policies to scrutiny and make them subject to external influence?,” he said. “Do emerging markets want to accept surveillance by international agencies that might turn out to be one-sided?”
Rajan also said that while the report “is sensible in not trying to push too far in understanding the mystery of growth,” it fails to list the “precise barriers” that would explain why the remaining countries haven’t grown as fast as the 13 in the study.
Banerjee praised the report for emphasizing pragmatic economic leadership, a virtue of having been written by actual policy makers. “They noticed they couldn’t quite play by the rules dictated by some institution in Washington DC.” He also liked that the report admits a possible role for industrial or trade policy.
Significantly, the report “rescues the word ‘growth’ from being simply a code word for free-market policies,” he said. However, Banerjee added, the report “suffers from what I would call knee-jerk macro-ism,” which “doesn’t take us close enough to the things that policy makers can affect.”
For example, “a well-designed social safety net might in the long run be a much more important way to sustain growth than all the fiddling with exchange rates,” Banerjee said.
by Mary Sue Penn