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Everything old is new again: Growth Commission rediscovers the state

17 June 2008

The Commission on Growth and Development, a group of policy makers, business leaders and scholars, has warmed to state intervention and cooled towards unfettered market-led reforms.

Led by Nobel Laureate and Stanford University professor of business Michael Spence, the Commission released a final synthesis in May of its many papers, case studies and workshops. It has been working since April 2006 with the support of the World Bank, the Hewlett Foundation, and the governments of Australia, Netherlands, Sweden and the UK.

The Commission’s growth fetish was made evident at the outset through its equating of quality growth with increases in GDP. This despite warnings not to do so by the Bank’s own evaluation unit in late 2006 (see Update 54). The Commission chose to study only the thirteen economies whose economies have expanded at an average rate of at least seven per cent a year for 25 years or longer since the second world war: Botswana, Brazil, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan and Thailand. According to the Commission, the group share five characteristics: exploitation of the global economy; macroeconomic stability; high rates of saving and investment; market-allocated resources; and capable governments.

in too many cases, the division of labour has put profits in private hands, and risks in the public lap

The admission that policy-making is complex and heterogeneous is refreshing. The key policy-making task is to “improve the effectiveness of government institutions rather than stripping them of their tasks”. The authors encourage governments to test policies through step-by-step gradualism and learn from mistakes.

The report’s criticism of the Washington Consensus is striking considering that it involved many of the key figures identified with the failed paradigm, such as former US treasury secretary Robert Rubin and economist John Williamson. The commissioners admit that developing countries often lack key market and regulatory institutions, “and policy makers cannot always know how the market will function without them”. In the vacuum created by the fall of the Washington Consensus, the Commission concedes that it does not know the sufficient conditions for growth, nor can it say for sure whether the measures that it recommends are necessary.

Amongst its recommendations, there are some predictable findings but also a number which break with prevailing economic orthodoxy. Investments in both physical and social infrastructure are emphasised, with the warning that “in too many cases, the division of labour [in public-private partnerships] has put profits in private hands, and risks in the public lap.” The commissioners back the transition of citizens out of agriculture and into export factories, and support the use of Special Economic Zones (though rights “should not be sacrificed”).

More surprising is the grudging admission that industrial policies can be effective if used temporarily, if they are critically evaluated, and if governments avoid picking winners. There is also cautious support for exchange rate management. The consensus came out against rapid financial liberalisation, saying developing countries “have come under considerable pressure from IFIs”. “Whether this is good advice”, the report continues, “seems to depend heavily on whether the economy is diversified, its capital markets mature, and its financial institutions strong.”

In recognition that these conditions are often not present, the Commission flies in the face of two decades of IMF doctrine, stating bluntly that “the fact that [capital] controls may be leaky and imperfect does not seem a decisive argument against them.” This is not the only black eye for the Fund. In a veiled jab at the inflation-obsessed Bretton Woods twin, the report questions the benefits of bringing inflation down to very low levels, advocates caution against central bank independence, and allows for flexibility in fiscal policy (“growth may itself depend on government investment”).

Sandeep Chachra, coordinator of NGO ActionAid International’s governance and economic justice programme, was left puzzled: “We need to ask why the World Bank marshalled $4 million to convene a commission of 21 experts when so much experience exists and the literature is already widely available on each issue that the report visits. The report does not say more than ‘a bit of this and a bit of that’ in a strange mix of orthodoxy and heterodoxy.” William Easterly, professor of economics New York University, has called for the end of experts. “Experts help as long as there are useful general principles, such as could be established by comparing low-growth and high-growth countries. The Growth Commission correctly pointed out that such an attempt to find secrets to growth has failed. The Growth Commission concluded that ‘answers’ had to be country specific and even period specific. The logical next step at this point would have been to give up on experts.”

The Growth Commission report discusses topics including: urbanisation, equity, regional development, environment and effective government. A chapter addresses growth challenges in Sub-Saharan Africa, small states and resource-rich countries. A number of cross-cutting issues receive treatment including: global warming (backing contraction and convergence); rising income inequality and protectionism; the rise of China and India and the decline of manufacturing prices; the rising price of food and fuel; demographics, aging and migration; and global imbalances and global governance.

While Commissioners will be pushing the findings in their own countries, the impact on the work of the Bank and Fund is unclear. Some commission members have been at pains to say that they did not want to influence Bank policy. The UK Department for International Development (DFID) is setting up a £40m ‘International Growth Centre’, to fund top economists to advise developing country governments on their growth strategies. The Centre is to be up and running by autumn 2008. Looks like we won’t be giving up on experts any time soon.

Fund jumps on growing bandwagon

A new study by Fund economists Berg, Ostry and Zettelmeyer looks at the factors that determine the length of growth spells. They find that growth duration is positively related to: the degree of equality of the income distribution; democratic institutions; export orientation; and macroeconomic stability including “lower inflation”. The researchers find that external shocks increase the risk that periods of growth will end.