Useful dos and don’ts for fast economic growth

Growth is not everything, but it is the foundation for everything. The poorer the country the more important growth becomes, partly because it is impossible to redistribute nothing and partly because higher incomes make a huge difference to the welfare of the poorest.

Based on an analysis of 13 countries that have managed growth of 7 per cent a year over at least 25 years in the recently published Growth Report, countries enjoy high growth share five points of resemblance: they fully exploited the opportunities afforded by the world economy; they maintained macroeconomic stability; they sustained high rates of saving and investment; they let markets allocate resources; and they had committed, credible and capable governments.

These points are consistent with the so-called “Washington consensus” of the 1990s, which emphasised macroeconomic stability, trade and the market. Yet the report’s emphasis is different: it does not stress privatisation, free markets and free trade, while it does emphasise the role of the so-called “developmental state”.

The ingredients of fast growth include: investment of at least 25 per cent of gross domestic product, predominantly financed by domestic savings, including investment of some 5-7 per cent of GDP in infrastructure; and spending by private and public sectors of another 7-8 per cent of GDP on education, training and health. They also include: inward technology transfer, facilitated by exploitation of opportunities for trade and inward foreign direct investment; acceptance of competition, structural change and urbanisation; competitive labour markets, at least at the margin; the need to bring environmental protection into development from the beginning; and equality of opportunity, particularly for women.

Particularly welcome is the short list of policies to be avoided. Among them are: subsidising energy; using the civil service as employer of last resort; reducing fiscal deficits by cutting spending on infrastructure; providing open-ended protection to specific sectors; using price controls as a way to curb inflation; banning exports, to keep domestic prices low; underinvesting in urban infrastructure; underpaying public servants, such as teachers; and allowing the exchange rate to appreciate too far, too quickly.

Running through the report is belief in the role of an engaged government. This reflects the commission’s composition and intended audience. The obvious weakness is that it ignores how effective governments emerge. But the stress is correct: rapid development occurs in strong states, with effective governments, not in weak ones.