5 Responses to “Useful dos and don’ts for an economy set on fast growth”

Comments

1. William Easterly: I am surprised that my column was so annoying to Martin Wolf, the rock of good economics and common sense, but I am glad he has moved the discussion forward with a lot of insightful comments. I have to respectfully disagree with both his take on my column and at least part of his take on the World Bank Growth Report. My advocating freedom for creative individuals to solve their own problems is not my own “expert recommendation” – it is saying: don’t listen to me or any other “development expert” who claims to be able to single-handedly determine the outcome of a whole society’s economic development. (The difficulty of getting this message across reminds me of a scene in Monty Python’s Life of Brian: Brian tries to dissuade his adoring followers: “you are individuals.” The followers obediently recite “we are individuals.”) “Individual freedom” is not a simplistic slogan or a recipe; it is extremely difficult to understand, much less for societies to achieve. As Hayek pointed out, the institutions that support individual freedom are “grown,” not “made” (the latter seems to rule out an important role for development experts). It is true that “freedom” is oversold as an instantaneous panacea by some of its more zealous ideologues (which I am not), but that does not change the long-run relationship between freedom and development.

   As for the oft-repeated “China exception” to the relationship between individual freedom and development, it is once again a question of changes versus levels. The LEVEL of individual freedom is associated with the LEVEL of per capita income (development) in the long run. It follows that it could very well happen that a big CHANGE in freedom such as occurred in China (certainly in economic freedom, and even in political freedom compared to totalitarian Mao) would be associated with a big CHANGE in per capita income (rapid economic growth).

   I also have to disagree with Martin on the Report’s discussion of “effective government,” “strong leaders,” etc. I found this part of the report banal, first of all because of the implicit tautology that an “effective” government is any government in power at the time of high growth. Secondly, hero-worship of leaders is such a universal ingredient of “success story” accounts in fields as diverse as business, war, and sports that it is hard to believe that this was some fresh insight derived from research in the World Bank Growth Report.

   Actually, we can verify that the “leadership” conclusion WASN’T derived from research from the Growth Commission’s own documents. If you look at the Commission’s “Framework for Case Studies” prepared BEFORE the Case Studies were done to guide the research, they made the following statement: “economic growth requires: Leadership.”* This is identical to the “conclusion” of the newly issued report allegedly based on evidence AFTER all the case studies had been done: “Growth ….requires strong political leadership.”

   Posted by: William Easterly | June 6th, 2008 at 11:58 am | Report this comment
   

2. Michael Spence: I would like to add some observations to the thread that began with a leader in the FT shortly after the release of the Growth Report from the Commission, and that included William Easterly’s commentary, comments from Paul Seabright and Roberto Zagha and op-ed piece by Martin Wolf with a response from William Easterly.

   Martin Wolf’s June 3 analysis seemed to me to be a very fair summary of the Growth Commission report. As a relative newcomer to a discussion that in some sense has been going on for years, I may be missing allusions to past disputes. With that qualification, I am struck by the extent of agreement on certain basic fundamental points.

   There seems to be no dispute about the proposition that the proximate drivers of growth are private sector investment, entrepreneurial activity and innovation responding to market incentives and opportunities. For these dynamics to work, economic freedom, access to capital, some reasonable clarity with respect to property rights, that is who owns what, are critical. There are no exceptions that we could find in looking at sustained high growth cases. And there are plenty of examples of much poorer economic performance in which one or several of these underpinnings are missing.

   In the course of 12 workshops involving 300 distinguished researchers interacting with experienced political leaders and policymakers over the past two years, this really quite fundamental starting point was not controversial. There is also pretty much uniform agreement that the global economy in the form of available knowledge and large elastic demand was the enabling factor that created the potential for the kind of sustained high growth that we have seen in the post war period. Without the catch-up effect and access to the huge potential market, growth is still possible but at much lower rates.

   In addition, there is widespread acceptance, I believe, that the microeconomic dynamics, competition, entry and exit are crucial to productivity increase and income growth, and they have to be allowed to work. Governments often intervene to protect incumbents, local monopolies, sources of government revenue, or companies and jobs. Such activities amount to throwing sand in the gears of the growth engine.

   The next logical question then is what do governments do and not do to support this kind of sustainable growth dynamics. If there is controversy, this is where I suspect that much of it lies.

   One possible answer is “as little as possible”. If this is meant to be a short version of either not intruding on the natural territory of the private sector (where decentralization, price signals, incentives and competition work better than any known alternative), or avoiding interference in the competitive dynamics (above) by restricting it or making it less efficient, then it would be widely accepted as one aspect of government’s role. A component of reforms in many countries has included removal of excessive or dysfunctional regulation and an intrusive government presence.

   But this aspect of growth oriented reform, important as it has been, seems to us only part of the story, and hence not an adequate or complete framework for country-level growth strategy and policy priority-setting. Much of the report is devoted to what might be called the more positive aspects of the public-sector role supporting role in sustained high growth. This is not the place to attempt a detailed summary. Let me mention some of the dimensions that emerged in the course of the work. Public sector investment in infrastructure and education with a focus on both quantity and effectiveness is important in elevating the returns and hence levels of private sector investment. Building a political consensus around a credible approach to growth that permits the inter-temporal choices (implied by high levels of saving and investment) to be made is part of this. Protecting people from the downside risks of the creation and destruction inherent in the microeconomic dynamics (protection in the form of transitional income support, access to basic services and retraining in employment transitions) are important to maintaining support for growth policies. Shifting incentives to overcome both transitory and more permanent structural informational gaps is another. Maintaining a reasonable balance between job creation and destruction through choices made about the pace and sequencing of opening the economy to foreign competition and the global economy is still another. Some of these areas (and there are others such as industrial policy and exchange rate management) are active subjects of research and remain areas of disagreement and controversy. We took the view that understanding the benefits and risks in these policy areas is a useful input to those who have to make decisions about them, even when the issues are not settled.

   Two other points struck me as worthy of attention. One I believe is widely accepted. While a framework can identify the elements of the sustained growth process and the policy ingredients that support it, actual priorities have to be country and context specific, because the initial conditions and the political environments vary greatly. That growth strategies are country specific does not mean that every case is completely idiosyncratic, nor does the fact that collectively we don’t know everything mean that we don’t know anything.

   Policy-setting in a developing country context might be described as sequential group decision-making under conditions of uncertainty with learning along the way. Much of the report is devoted to how to do this well (or perhaps just better) and to what has been learned from research and experience in the past 15 years about successful navigation under these conditions.

   Second, we devoted considerable attention to what could be called the various dimensions of inclusiveness. This has to do with income inequality and the evolution of the income distribution in the course of growth. It also has to do with whether subgroups based on religion, ethnicity, caste or class, tribal affiliation or gender are systematically excluded from the opportunities created by the growth process, either by fiat or through under investment in their human capital. The reason for this focus is that experience suggests that significant shortfalls in any of these dimensions are very likely to derail the growth process and hence make it unsustainable, or to lead to poor performance due to under utilization of potentially valuable human resources.

   Michael Spence is Professor Emeritus of Management in the Graduate School of Business at Stanford University and chairman of the independent Commission on Growth and Development

   Posted by: Michael Spence | June 8th, 2008 at 10:09 am | Report this comment
   

3. Martin Wolf: I think this has been an interesting exchange. I have one comment on what Mike Spence says and some more comments on what Bill Easterly says.

   My comment on Mike is that I do think the report makes too little of the role of institutions in development, including the vexed, but important, issue of corruption. It would have been good to have had a deeper discussion of these questions.

   Bill continues to insist he offers no expertise. But he is not saying, with Socrates, that the only thing he knows is that he does not know anything. He is saying something more precise than that: this is that the level of individual freedom is associated with the level of income per head. I agree with this, so far as it goes. But that is expertise. Sorry, Bill!

   I would also like to take this discussion a little deeper. At one point in my life, I read almost everything had Hayek written on freedom. It was evident (at least to me) that there was a deep internal contradiction.

   Hayek believed that freedom worked, because it allowed the right kind of social and economic evolution. Hayek also believed that evolution was the right way for a society to develop. So what is one to say if societies evolve away from freedom? Should one conclude that the absence of freedom was good because it had evolved or insist, instead, that freedom was good because it allowed the right sort of evolution.

   Much the same contradiction is buried in Bill’s view. Should one recommend freedom as a strategy because it is the right approach? Or should one not recommend it because doing so would interfere in social evolution? The former is indeed a recommendation, however hedged around it may be. The latter amounts to saying that whatever is must be good, because if it were not good it would not be.

   I cannot imagine that Bill wants to say the latter. So he is presumably saying the former. He is indeed claiming a degree of expertise. But it is then reasonable to ask: is that really all he knows? Does he really have no expert view about whether governments should lower tariffs or raise them, subsidise energy prices or not and so on and so forth?

   I also believe that Bill’s distinction between changes and levels is forced. If one believes levels of freedom are associated with levels of economic welfare, one is likely to believe that big changes in the former will normally generate big changes in the latter. It is likely that this will also mean one gets to the higher levels faster – i.e. enjoys a faster rate of economic growth.

   Obviously, nobody is interested in the rate of growth itself, but rather in the speed with which people gain a certain level of income. So the contrast between Bill’s emphasis on income levels and the Growth Commission’s emphasis on growth is not as clear-cut as Bill seems to believe, as his own example of China shows. I would also use the examples of South Korea and Taiwan in much the same way.

   I am more sympathetic to Bill’s comments on effective leadership. Since the commission consisted largely of policy makers, it seemed to me inevitable that they would consider leadership – i..e. what they do – important. As a matter of fact, I believe leadership is important, because the quality of government is self-evidently important and that depends, in part, on the quality of the people engaged in it. But it is virtually impossible to prove such a thing. How does one measure the quality of leadership?

   Posted by: Martin Wolf | June 10th, 2008 at 7:54 pm | Report this comment
   

4. Clive Crook: Like Bill, I was surprised that Martin took such a dim view of his column on the Growth Commission’s report. Bill’s main point was that the report has a dirigiste conception of the challenge–and Martin seems to agree with him about that. Yet Martin springs to the commission’s defence. You see why I am surprised.

   As Martin says, there’s a lot of material in the report that is interesting and valuable (and let me pay tribute to its clarity, not to be taken for granted in documents of this kind; the editor, Simon Cox of The Economist, did a fabulous job). The report rightly underlines the importance of growth, which Martin regards as a main contribution. No doubt some people do need convincing on that point, but few developing-country policymakers, at whom the report is aimed, are among them. Even before they saw this report, they wanted their economies to grow faster. What they need is guidance on how to do it.

   General guidance requires general principles. What are they? The success stories’ points of resemblance, says the report, are international integration, macro stability, high saving and investment, market allocation of resources, and capable governments. Fine. I dare say, as Bill suggests, this list could have been written down before the commission started work.

   The challenge of course is to put these principles into practice. How do you achieve those things? Are there any broadly applicable lessons to be learned about that? Partly, the report says no: everything is both country-specific and period-specific. But if that was all you had to say, you would write a very short report. So the commission goes on, and in doing so produces not so much an actionable principle as a mindset. Martin says the report is novel in shifting the emphasis away from light-touch government towards the “developmental state”. I read it that way too. The question is whether this shift is not just novel (not so novel, in fact, if you look back a decade or two) but also wise.

   I was hoping that Larry Summers might join in this thread. At a meeting to discuss the forthcoming report in April, hosted by the Hamilton Project and the Brookings Institution, Larry made what I thought were very pertinent comments. (The transcript of the whole discussion, including comments by Robert Rubin and Michael Spence’s response, is worth reading.) Larry’s points were more politely expressed than Bill’s, but amounted to similar criticisms. He pointed to the report’s insufficient stress on the difficulty of picking winners, the dangers of a manufacturing-exports push that dismisses the opportunities for natural-resource exports, and “the [limited] capacity of governments to execute these strategies well”.

   Larry also made this telling methodological point, which I think is again in tune with Bill’s broader view:

   “If you wanted to study the keys to getting wealthy, one approach would be to interview the members of the Forbes 400 and see how they did it. And you would find that they all dismissed the precepts of conventional finance, that none of them believed in diversification, that all of them believed in a strong-willed, nondiversified, make-a-single-big-bet approach, and you might well on the basis of your research be led to counsel very considerable skepticism about conventional financial theory as an approach. That would probably be bad advice for the vast majority of investors. And I have the concern that picking out the characteristics of recent successes may also be problematic as an approach to thinking about growth.”

   Should ordinary governments be modest about their capabilities, or place big bets and “go for growth”? The “developmental state” is a very ambitious conception of their role. Too ambitious, Bill argues, and I agree.

   Posted by: Clive Crook | June 12th, 2008 at 4:35 pm | Report this comment
   

5. Martin Wolf: I would like to respond to Clive’s comments. I agree with him that it’s a pity Larry has not been involved in this discussion. But let me respond to him in the following three ways.

   First, I think it is perfectly possible to believe that the Growth Commission is too dirigiste in its approach to development, while thinking Bill’s scepticism excessive. Bill’s correct observation that today’s rich countries have broadly liberal market economies (though with massive amounts of intervention) does not demonstrate that adoption of such an approach by poor countries would necessarily make them richer. Jeff Sachs would strongly deny this, for quite good reasons. It does not show that adopting a more dirigiste approach would lead to failure either. After all, most of the rich countries of today had a dirigiste past. So the logical conclusion of Bill’s position is that we know nothing about development. I disagree with this agnosticism. Is Clive’s position really so different on this from mine?

   Second, I agree that this report assumes a developmental state – that is a state intending to promote development. This was inevitable, given the composition of the commission. Decent people in charge of policy in poor countries are sure to believe they can do things to make the people they are responsible for better off.

   Is this so foolish? Policymakers can hardly pretend they live in the England of the 1840s, where even doing anything about the Irish famine was seen as unreasonably interventionist. Even the Victorians decided to build sewers and promote the construction of railways. So if policymakers are going to take the obligation to promote development seriously, why not give them sensible rather than foolish advice, or none at all?

   The report does seem to me to give policymakers sensible advice. Is Clive arguing that it is a bad thing to educate girls or build infrastructure? The report recommends quite a modest range of interventions by the state. Indeed, it is more reasonable to argue that its recommendations are banal than harmful. The report is cautious on industrial policy, for example. But are we going to pretend that industrial policy had nothing to do with what happened in Germany, Japan or South Korea?

   Third, I take the reported objection by Larry seriously. He raises the question how we learn from the experience of others. Do we get rich by copying Warren Buffett? Probably not. But if one takes the debate on trade and development, the decisive change in attitude in favour of more liberal policies followed detailed examination of constrasting experiences in the 1960s and 1970s. Would Clive argue that this was an unreasonable approach? But it clearly involved learning from the trade policy experience of successful countries.

   Indeed, other than from theory, there is nothing else to learn from. If one objects to such cautious learning (and the report is cautious) one is pushed into saying we know nothing about the development process. But, in my view, that would be wrong. We do know some things about it. To argue we do not is to conclude that economists have learned nothing about this most important of all questions over the last two centuries. I do not believe Clive believes that and I would be surprised if Larry did so either.

   Posted by: Martin Wolf | June 20th, 2008 at 4:46 pm | Report this comment
   

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