Debates over the relationship between trade openness and growth have been going on for around 160 years. A key aspect of that debate is how important growth is for poor countries as they strive to catch up with the best-of-the best in a competitive world. For openness to succeed, you must first put in place ports, roads and other building blocks for prosperity, and you need well functioning bureaucracy to help build the foundation for a strong trade sector. Passionate free-trader Arvind Panagariya, Columbia University Economics Professor and Jagdish Bhagwati Professor of Indian Political Economy, spoke eloquently about this at his February 16 Development Economics (DEC) Lecture at the World Bank. His research has entailed cross-country case studies of what he terms ‘debacles’ and ‘successes’ in Asia, Africa and beyond. On the one hand, Panagariya admitted that free trade is no panacea to overcome stagnation and he acknowledged that trade liberalization has failed to catalyze and sustain growth in many instances. On the other, he argued that there are many more examples of countries failing to stimulate growth through protectionism. Panagariya expressed skepticism about industrial policy, but cautioned that its presence cannot prove either the beneficial or harmful impact of openness on growth. You can watch the interview with Professor Panagariya here.
Train station. India. Photo: © Curt Carnemark / World Bank
Shanta’s thoughtful comments on our Growth Identification and facilitation (GIF) paper are most welcome. The issues of industrialization and structural transformation are at the heart of economic development. Following comments already made by my co-author Célestin Monga on this blog, let me offer a few thoughts to this exchange.
First, the GIF approach explains the economic success of a very diverse group of countries: China (with 1.3 billion population), Japan (100 million); Taiwan-China (20 million); Korea (40 million); Singapore (5 million); or Mauritius (400.000). The framework has also been applied in large Western countries such as Germany, France, and United States, and small European countries like Sweden, Norway, Finland, and Ireland. The political systems of those economies are also very different, some are democratic and some are authoritarian.
Presidents Hu and Obama created buzz earlier this week in Washington when they met on pressing bilateral issues, including US-China business and investment regulation, trade, currency imbalances and security concerns. US-China clean energy cooperation is an important part of that bilateral dialogue (see transcript of my intervention at a January 18 US-China Strategic Forum hosted by Brookings).
Cooperation between the two countries can yield big economic benefits. The world is recovering from the worst economic crisis since the Great Depression. In this context, taking advantage of clean energy opportunities is crucial to fueling a sustained global recovery.
As surprising as it may seem, there is a deep dark secret at the core of the System of National Accounts (SNA) – the accounts used by Finance ministries worldwide to measure economic performance. The numbers don’t add up. We can see this in the table below, showing the net worth of Brazil and its composition in 2005. The final two lines in the table report a measure of Brazil’s net national income and the implicit rate of return on wealth (the ratio of income to net worth). The return to Brazil’s produced and natural capital is over 18%! As good economists, we should all be investing our pension funds in Brazil. Why? Because financial market data tell us that the long run real rate of return across the broad range of assets averages only about 5% a year.
|Table – Net worth and net national
Income (NNI) in Brazil, 2005, $million
|Net financial assets||-117,221|
|Implicit rate of return||18.2%|
|Source: The Changing Wealth of Nations
World Bank (2011)
|Photo: © World Bank|
Two years after the crisis triggered by the collapse of Lehman Brothers, the world economy has entered a new phase of recovery. Most developing countries have recovered to pre-crisis (or close to pre-crisis) levels of activity and have transitioned from a bounce-back phase to more mature growth.
We estimate in our new online Global Economic Prospects 2011 report that the growth rate for the world economy was 3.9% in 2010 and is likely to be to 3.3% this year, then 3.6 % in 2012.
The GDP growth rate for developing countries was a robust 7 percent in 2010, up sharply from 2% growth in 2009. This year we project the developing world will record GDP growth of 6%, then edge to an estimated 6.1% in 2012. This far outstrips the high income countries, which grew by 2.8% in 2010 and are estimated to growth by 2.4% this year and 2.7% next year.
As snow covers ground in Washington, D.C., debt markets swoon, and another year comes to a close, it seems like a good time to look at what actually happened to international capital flows to developing countries last year and what that might portend for flows in 2010, as this year’s numbers will be finalized in coming months.
At a time when the global economy has seen the most severe slowdown since the end of WWII, capital flows to the developing world—including private flows (debt and equity) and official capital flows (loans and grants from all sources)—are in an overall slump, well below their level in 2007 ($1.1 trillion). According to the just-published Global Development Finance: External Debt of Developing Countries, which contains detailed data on the external debt of 128 developing countries for 2009, net capital flows to these countries fell by 20 percent from $744 billion in 2008 to $598 billion in 2009.
The book’s editor, Mustapha Nabli, estimates that the average potential growth rate for the ten countries before the financial crisis was about 6 percent. Unlike the overheated financial sector, pre-crisis trade and remittance levels were sustainable.
Once the crisis hit, however, less diversified countries really felt the heat. Their financial sectors eventually recovered, but trade remained low, thus adversely affecting their growth. 13.6 percent of Turkey’s 2009 GDP, for example, was shaved off during the financial crisis. Possibly this was due in part to fears left over from past financial crises.
|Light manufacturing operations in a Chinese standardized factory building|
There is a shared sense that globalization has a strong potential to contribute to growth and poverty alleviation. There are several examples of countries in which integration into the world economy was followed by strong growth and a reduction of poverty, but evidence also indicates that trade opening does not automatically engender growth. The question therefore arises, why the effects of globalization have been so different among countries of the world.
A look at changes in the structure of employment in Latin America and in Asia hints at possible explanations for observed differences in the growth effects of trade. Since the 1980s, Asia and Latin America have both rapidly integrated into the world economy. Asia has enjoyed rapid employment and productivity growth, but the consequences for Latin America have been less stellar.
The chart below shows how the pattern of structural change has differed in the two continents. The chart decomposes labor productivity growth in the two regions into three components: (i) a “within” component that is the weighted average of labor productivity growth in each sector of the economy; (ii) a “between” component that captures economy-wide gains (or losses) from the reallocation of labor between sectors with differing levels of labor productivity; and (iii) a “cross” component that measures the gains (or losses) from the reallocation of labor to sectors with above-average (below-average) productivity growth. The underlying data for the charts come from the Groningen Growth and Development Centre.
(Also available in Spanish)
Many observers predict that this week’s G-20 Summit in Seoul will be remembered mainly as a dance of high diplomacy aimed at persuading members to refrain from competitive devaluation of currencies and to reign in excessive current account imbalances.
If most headlines from Seoul are about spats over currencies and whose deficit or surplus is most harmful, then leaders will have missed the Seoul of the Matter.
Indeed, such an outcome would be a setback for developing countries and could potentially erode the legitimacy of the G-20 as an inclusive broker of financial and economic cooperation in the global economy.