Discarding the myths of development

from the BBC

By Steve Schifferes
Economics reporter, BBC News

Markets alone will not produce the growth in developing countries that will lift them out of poverty.

Government intervention in the economy, and a degree of protectionism, will be needed in the early stages of development.

These are the key findings of an independent Growth Commission made up of key policy makers and economists which was set up to find out the key elements that lead poor countries to get rich.


The report reaffirms the need for engagement with the global economy - including the transfer of key technologies and export specialisation - which are key to long-term sustainable growth.

But it points out that policies which support equality are also crucial to making sure the benefits are equally distributed, and to ensuring political support for globalisation.

IMF view under fire

The report is an implicit attack on the "Washington consensus", the belief that orthodox economic policy, complete opening of markets, and the reduction of the role of the state was the best way for developing countries to grow.

This view has often been re-enforced by strict rules set down the International Monetary Fund and World Bank as a condition to lending to countries in trouble.

The criticism is particularly striking, given that the Commission includes several key figures who shaped that consensus, including former US Treasury Secretary Robert Rubin, former Mexican President Ernesto Zedillo, and South Korean president Han Duck Soo.

"Orthodoxies apply only so far," the report says.

"Economists know how mature markets work, and can say with some confidence how they will respond to their policy prescriptions."

But there is no such confidence in developing countries that lack key market and regulatory institutions, "and policy makers cannot always know how the a market will function without them".

Chinese example

It quotes approving Deng Xiaoping - the architect of China's liberalisation - saying that to find the path to economic growth "cross the river by feeling for the stones."

In recent years, the report says, "governments were advised to 'stabilise, privatise and liberalise'... but we believe this prescription defines the role of governments too narrowly.

"Just because governments are sometimes clumsy and sometimes errant, this does not mean they should be written out of the script."

Indeed, "no country has sustained rapid growth without also keeping up an impressive rate of public investment in infrastructure, education, and health.. far from crowding out private investment, this spending crowds it in".

Need for equality

The report also breaks ranks with the conventional wisdom in arguing that not just growth, but equitable growth, is needed.

It warned that "income equality is rising in a surprising number of countries across the globe" since the l980s.

And it warned that growing inequaility, as well as a rapid shift in the location of jobs, was fanning growing opposition to globalisation and free trade among the public.

As professor Robert Solow, a Nobel prize-winning economist who is a member of the commission said:

"The more equitable the growth, the more sustainable it is likely to be. Leadership and governance can only work when it is supported by wide parts of the population."

However, the report points out that democracy does not seem to be essential for fast growth, at least in the early stages.

Many of the 13 fastest-growing developing countries over the past 40 years - including China, Indonesia, Korea, Brazil and Singapore - had one-party governments for at least part of that period.

Radical measures by the rich

The report also calls the rich countries to play their role in helping encourage development.

It is highly critical of the spread of biofuels, which it says is hurting the poor in developing countries hard by exacerbating the food crisis.

And it calls for rich countries to "finance the expansion of Africa's higher education system to make up for Africa's 'brain drain'."

That is needed because a large proportion of Africa's highly educated doctors and engineers have migrated to rich countries where they can earn higher salaries.

Commission chairman Professor Michael Spence said that advanced economies needed to play their role "bringing to an end the current focus on energy subsidies and biofuels, and an end to protectionist policies which limit developing world access to global markets that are central to growth".

But with the key Doha Round of global trade talks stalled, and with rich countries growing more protectionist as their economies slow down, this goal seems further away than ever.

The World Bank recently warned that the Millenium Development Goals aimed at improving living standards in poor countries are falling far short, particularly in Africa.

The thirteen fast-growing developing countries considered by the report were: Botswana, Brazil, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan, and Thailand.