A practical guide to growth

The independent World Bank-supported Growth Commission headed by Nobel laureate and Stanford University Professor Michael Spence has come up with a useful, practical guide for policy makers in the developing world. Not surprising, considering that many of its members themselves belonged to this tribe. The commission’s report is the outcome of a detailed analysis of 13 countries that have had a sustained annual growth rate of 7 per cent for at least 25 years. Singapore, China, Hong Kong, Brazil, and Botswana were among those that made it to the list. On present reckoning, India and Vietnam are poised to join them soon. Given their diverse economic and cultural backgrounds, these countries do not make a homogeneous group. Yet there are very significant similarities. Almost all of them have benefited from globalisation; maintained macroeconomic stability; encouraged resources allocation by markets; and, most importantly, had capable and committed governments. These features accorded with the so-called Washington consensus that dominated economic thinking in the mid-1990s. Strikingly, the Growth Commission is anything but dogmatic about its formulations. Its report does not lay undue emphasis on privatisation, free markets and free trade, but recognises the role of government in the development process.

At a fundamental level, the report stresses the importance of growth, whose role was sought to be downplayed by some activists in the late 1990s. In its prescription for faster growth as well as in its list of policies that governments should avoid, the commission is refreshingly down-to-earth. It suggests an investment of at least 25 per cent of the GDP, financed mostly by domestic savings; an investment of 5 to 7 per cent in infrastructure; and an expenditure of another 7 to 8 per cent by public and private sectors on education, health, and training. The negative list includes subsidising energy, a hotly debated topic now; reducing investment in infrastructure to hold down fiscal deficits; using price controls to check inflation; and banning exports to keep domestic prices stable. Elsewhere, the report opens the door for a debate on key issues such as exchange rate flexibility, the role of industrial policy, and export promotion. Overall, the report is a pragmatic guide to policies for accelerating economic growth in developing countries.