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When Growth Seems to Work — Foreign Policy

Posted on June 2, 2008

“Seven Questions: How Countries Get Rich“ from Foreign Policy, Posted May 2008Why do some countries succeed when others struggle? That’s what Nobel laureate A. Michael Spence and the Commission on Growth and Development set out to discover in their landmark study of the world’s 13 fastest-growing economies.The secret to growth? The real secret of economic development, says Spence, is that there are no secrets.Why do some countries succeed when others struggle? That’s what Nobel laureate A. Michael Spence and the Commission on Growth and Development set out to discover in their landmark study of the world’s 13 fastest-growing economies.Foreign Policy: You’ve obviously studied development topics in economics for a long time. Was there anything that surprised you as you did your research with the commission?Michael Spence: I was surprised by two things. One, how important the global economy is for developing countries both in terms of demand, meaning the size of the market and your ability to expand it once you get a cost position, and also from the point of view of importing technology or knowledge. But the biggest surprise was how important political leadership is in looking at cases of sustained high growth in developing countries. There’s a whole lot of consensus building and picking the right model, getting everybody on board, making deals with stakeholders like labor and business, and a persistent kind of pragmatic approach with imperfect knowledge about how the economy is going to respond to policy. I started out thinking this was a subject that was mainly about economics, and I ended up thinking that was about half of it, but the other half is really political.FP: Were you able to discover any secret to growth among the countries that you studied?MS: I don’t think there’s any kind of secret. There are certainly common characteristics of the sustained high-growth cases, and they’re described in some detail in the report. I don’t view them as secrets. But we haven’t been able to find a case where, if you avoid the general approach that’s described there—engagement with the global economy; being careful to bring everybody on board; very high savings and investment levels; a stable macro environment and a pretty heavy reliance on the basic characteristics of market allocation, price signals, and stuff; and being willing to put up with rather chaotic microeconomic dynamics—you can sustain high growth.FP: Some people have read your report as an implicit critique of the so-called Washington Consensus. Do your findings contradict the kinds of things that the World Bank and the International Monetary Fund were promoting, especially in the 1990s?MS: No. At least that wasn’t the intent. Since the Washington Consensus in its various forms was developed and then experimented with in developing countries, there’s been a huge amount of experience and learning everywhere—in developing countries, in the academic community, in the international institutions. We never stop at a point where you know all the answers to questions, and there are a lot of things that are still highly debated. There is still a lot of merit in a good deal of the Washington Consensus. The open-economy orientation, even if it needs some modulation, is certainly right. The stable macroeconomic environment, however you achieve it, is surely right. What’s probably different about this report is there’s a somewhat different view about what government’s role is and how it evolves over the course of a long period of sustained growth than was probably envisaged in the Washington Consensus.FP: What’s your view on corruption as a drag on development? Countries like India, China, Indonesia, and South Korea have major problems with corruption, and yet they’ve been able to grow fairly successfully.MS: I think it depends on the kind of corruption. This is an active subject of research, so we’re learning all the time. I would say really small-scale corruption is not necessarily a good thing, but it’s a little bit like a tax. If it gets out of hand and turns into big delays in things like establishing businesses or getting approvals for investment projects, it can be a problem. The really destructive kind of corruption, I would describe as wholesale theft on a large scale, where governments are really living on taking the national resources and using them to buy votes and stay in power. That seems to be completely destructive of the sustained growth and policies that are needed to support it.FP: You mentioned national resources. What about commodity prices? A lot of countries in places like sub-Saharan Africa are growing in large measure because of this run-up in commodity prices that we’re seeing.MS: That’s true. There’s a growth acceleration on a rather broad base in Africa and parts of Latin America. Some of it, maybe even a fairly large amount of it, is based on commodity price run-ups. There’s also better control of inflation, better macroeconomic management, more effective leadership in government to throw into the mix depending on which case you’re talking about. Other than the current food emergency, the run-up in commodity prices is a huge opportunity for many African countries and for the continent as a whole. And the trick is to turn the increased wealth and resource rent into a pattern of investment in things like education and infrastructure and other things that support economic diversification and productive-employment creation and growth that sustains. The jury’s out, but people are hopeful that will happen.FP: Are there any countries in particular that you see as not squandering the commodity price boom?MS: Every country is a complex case study, but not every country just squanders the wealth. For a long period of time, Botswana has avoided squandering their resource wealth, which is diamonds. And South Africa does a pretty good job, but they still have high unemployment and need a broadening pattern of growth. There’s a lot of skill and expertise and knowing what you’re doing that goes into dealing with natural resource rents well. In some of the African countries, it’s going to take effective leadership and probably some international advice and expertise to make this all happen.FP: This is different than your standard research report, because you’re actively going out and promoting it. You’re hoping that it’s going to have a real-world effect. What are you trying to do to get the lessons put into practice?MS: This report is really more about a framework. How do the growth dynamics work, and what kind of policies tend to support it? When you get to the country level, it has to get very specific and depends entirely on history and the initial conditions and things like that. So, for a period of months, we’re going to go out and, having given people the chance to read the report, discuss it and debate it in various settings. And just do a good job of seeing it as an input rather than an output. It’s an occasion to have a discussion that may help focus the policy and priority-setting process in developing countries, and that would be a good thing.

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