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Five conditions to create wealth. Has your country met them?

Oscar Calvo's picture

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In the context of a global economic slowdown and the search for balanced economic growth, I offer some elements for discussion.

All countries aspire to strong, sustainable economic growth given that it makes reducing poverty and expanding opportunities for all citizens much more feasible. There is no doubt about that. But how are high rates of growth achieved over the long term?

Clearly, there is no single magic formula. However, economists do agree on the ingredients that are necessary for any recipe for growth.

The Growth Commission has used this useful recipe metaphor to list the key ingredients: 

  • Economic integration: high-, sustained-growth countries invariably joined the global economy and wisely took advantage of globalization. Consider China and many Asian economies. Or, closer to home, in Central America, the cases of Panama and Costa Rica over the past 10 years.
  • Macroeconomic stability: in economist-speak, this is a necessary but insufficient condition. Central America has also done well in this area. Economic policies of the 1970s led to an instability that stunted economic growth, even producing negative growth, during the 1980s. But stability by itself does not necessarily generate high growth, as the performance of the Guatemalan economy in recent decades demonstrates.
  • High savings and investment rates: Above 25% of GDP, combining public and private investment and with significant investment in human capital and physical infrastructure. However, it is essential that the high levels of public investment do not threaten macroeconomic stability. To this end, the public sector needs sufficient resources and efficiency to be able to make the necessary expenditures to close gaps in human and physical capital. 

Markets that function well, where prices are conducive to efficient investment, savings or consumption decisions and in which competition exists. Again, it is often said that there is no growth without competition, yet competition by itself does not guarantee growth. 
Committed, credible and capable governments with a well-defined growth strategy. International experience suggests that growth strategies tend to be more successful when they include the promise of equal opportunity and offer all citizens the same possibilities for enjoying the fruits of growth.

Like everything else in economics, this summary is subject to nuances, and will undoubtedly have detractors.

That reminds me of what Winston Churchill once said: "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions." Clearly, the task is not an easy one, but the benefits of sustaining high growth over time are worth the effort.

Comments

Submitted by Blanca Moreno-Dodson on
I guess this may be one of many "second" opinions you will get from us economists. While I am not disagreeing with you, I think that promoting sustained high growth gains over time is necessary but not suficient in many of the developing countries where we work. Growth must not only be sustained over time but also be inclusive. Economic sectors or/and society segments should not be left out of the growth process. Otherwise,societies would grow more and more unequal, creating disparities which in the long run will undermine growth. In order to promote inclusive growth, some specific measures to protect the poor and help them be part of the productive labor force and social system need to be taken. Those can take many different forms and do not necessarily mean more taxes, public spending, or regulations. Such measures should not jeopardize the role of the private sector as growth engine in any way. On the contrary, it would be a win-win for everyone.

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