Session3 - MSc Spring2015 (1)

GOVERNANCE FOR

GROWTH

SESSION 3 SUSTAINABLE INTERNATIONAL BUSINESS

CATCH UPThe WC paradigm relied on macro orthodoxy + de-regulation + privatization, and was

imposed/recommended to countries during the 1980s

The results have been disappointing, including:

The emergence of a highly unstable global financial system, which has made

undermined the stability required to make long-run policy decisions

The very low rates of growth in Latin America and Africa, through the 21st century

Nevertheless, in some countries in Eastern Europe, privatization and the Washington

Consensus were successful and contributed to growth.

The demise of many privatization programs highlights some of the challenges

In the infrastructure sector, it requires capability to regulate (governance, skills)

which is scarce in developing countries.

Many governments look only for cash returns, and disregard efficiency and

development goals, particularly in corrupt environments

In many success countries, the solutions create incentives for efficiency were

different and adapted to local environment (Town-and-Village Enterprises, in China;

Government Linked Companies, in Singapore)

The policy suite for development is conceptually unclear, after the failures of the

Washington Consensus.SIB - MSc - S3

2

CHAD. THE

DANGERS OF OIL

SIB 3 GOVERNANCE FOR GROWTH

3

SIB - MSc - S3

LIKE ELSEWHERE, AID AS BEEN INEFFECTIVE

AS A DEVELOPMENT TOOL IN CHAD

Official Development Assistance (million dollars)

1991 1992 1993 1994 1995

Bilateral 140 148 148 104 129

(of which France) 83 90 89 65 72

Multilateral 126 92 79 110 112

(of which IDA) 46 32 24 36 40

Total 266 241 227 215 239

(of which grants) 179 180 180 166 187

External debt (million dollars)Total 634 727 771 824 908

(of which long-term) 565 676 717 755 839

(of which concessional) 503 546 599 675 743

Total debt service paid 11 11 17 18 16

Debt service/exports (%) 4.6 4.8 8.4 9.3 5.9

Source: World Bank, African Economic Indicators 1997, and Economist Intelligence Unit.

SIB - MSc - S3

5

OIL IN CHADPrivate sponsors: (70 %)

Exxon (40%); Chevron (35%);

Petronas (25%)

Global Capital Markets: (27%)

Export-credit agencies

Commercial banks

IFC

Chad and Cameroon: (3%)

Minority shareholders of

pipeline companies; IDA

financed

Royalties from Oilfields

Tax revenues

Oil exports started end 2003

SIB - MSc - S3

6

Total cost: $ 3.7 billion

WILL OIL ADDRESS CHADS DEVELOPMENT

TROUBLES?

Benefits to Chad

Jobs:

The industry is highly capital intensive and will create only 400 jobs, mostly for ex-pats

Employment of highly paid, unskilled during construction stage (3,000) will create ethnic

tension: In 1 hour, a worker will receive a daily farm income.

Local firms will find it hard to subcontract due to low quality of their products (e.g. food)

Government revenues

An annual increase of 45-50% in government revenues: royalties, dividends and tax

revenues

What are the implications for economic development in Chad?

SIB - MSc - S3

7

THE STORIES OF RESOURCE RICH COUNTRIES (OIL, NATURAL GAS, DIAMONDS)

Average GDP per capita growth ( %)

60s 70s 80s 90s 00s 60s-00s

Botswana 5,7 11,2 7,5 3,2 2,6 6,0

Malaysia 3,5 5,3 3,2 4,6 2,4 3,8

Norway 3,4 4,1 2,2 3,1 1,0 2,8

Nigeria 2,7 2,1 (1,3) 0,3 3,6 1,5

Saudi Arabia 8,0 (5,5) 0,3 0,9 0,9

Congo, D.R. 0,5 (2,4) (2,1) (8,4) 1,5 (2,2)

SIB - MSc - S3

8

THE NATURAL RESOURCE CURSE

THE NATURAL RESOURCE CURSE

IS DRIVEN BY WEAK POLITICAL

INSTITUTIONS!

SIB - MSc - S3

9

Institutional quality is the key to understanding the resource curse: when institutions are bad,

resource abundance is a growth curse; when institutions are good, resource abundance is a

blessing. Mehlum, Halvor; Moene, Karl; Torvik, Ragnar

(World Economy; 2006)

OTHER DRIVERS OF THE NATURAL RESOURCE

CURSE!

Lack of capacity to manage increase in revenue

Need for capacity building to manage revenues for:

Sharing the benefits with the people: infrastructure, education and social

needs (housing, health);

Saving for the future, when oil runs out (Gabon);

Stabilize highly fluctuating revenues: high revenues raise spending and rent-

seeking, while low revenues create deficits and debt (e.g. Angola, Nigeria).

Dutch Disease

Oil sector will attract the best, and crowd out traditional sectors and

entrepreneurs (an effect similar to Aid).

Appreciation of the real exchange rate, due to Oil exports, will undermine

competitiveness of traditional exports

SIB - MSc - S3

10

THE EXPLOSIVE COMBINATION OF A WEAK

STATE AND MINERAL WEALTH

SIB - MSc - S3

11

We

ak

Sta

te in

Ch

ad

Po

or g

ove

rna

nce

(po

litics, s

ocia

l)

Fa

iling in

stitu

tion

s a

nd

so

cia

l/ e

thn

ic

fragm

en

tatio

n

Po

or e

du

ca

tion

al a

ttain

me

nt

Inability of government to share, save and

manage the volatile revenues

Danger to traditional industries (Dutch

disease)

Threats to political stability: rent-seeking

(corruption), ethnic conflict, repression

Environmental damage and danger to

indigenous lifestyles.

Should Exxon care?

ARE THE RISKS FOR CHAD RISKS FOR THE

CONSORTIUM?

Potential for negative effects in brand image with consumers around the world, including the risk of boycotts (Shell, Nigeria)

Building of negative relationship with NGOs, a key partner in todays corporate world, as well as the World Bank

Negative corporate image will affect the motivation of human resources and the ability to recruit talent

Potential for negative effect may spillover to the political sphere in home country (e.g. relationship with US Government)

Global Impact

Increase political risk, due to the potential for social turmoil in the region, with implications for the security of the operation

Political instability in the country may lead to a change in government, and potential for expropriation

Adverse impact with local communities will hurt recruitment and hurt the security of the operations, and hinder penetration in local markets

Local Impact

SIB - MSc - S3

12

THE WORLD BANKS ROLE

PETROLEUM REVENUE MANAGEMENT

(PRMP)

10% set aside in a fund to be spent when oil

resources would no longer exist;

72% earmarked for priority sectors such as

education, health and social services, rural

development, infrastructure and environmental

and water resource management;

4.5% go to community-driven projects in the oil-

producing region

13.5% go directly into the general budget.

Establishment of a petroleum oversight

committee to monitor the use of petroleum

revenues

OTHER PROGRAMS

Increase skills and capacity:

Two IDA financed capacity-building projects

Manage and mitigate the impact of the project

Strengthen the ability to develop the necessary regulatory framework

Build capacity to implement revenue allocation goals

Thorough environmental study required from private investors

Consulted local populations and NGOs

Re-routing of pipeline to minimize implications for the local populations

Creation of two national parks, financed by private investors, to replace loss of tropical forest

SIB - MSc - S3

13

Will this work?

EPILOGUE

SIB - MSc - S3

14

The World Bank approved the project on

Jun 6, 2000. NGOs argued very strongly

against it!

Shortly after the vote, Chevron and

Petronas paid Chads president a $25m

signing bonus. A few months after, he

admitted the $4.5 m had been used for

military expenditures.

As of June 30, 2006, Chad had earned

$537 million, since production began in

2003. $295 million was allocated to the

priority sectors. $18.8 million has been

allocated to the oil-producing region itself

to support regional and community-driven

development projects to benefit to the

local population. World Bank website

source: www.essochad.com

DEVELOPMENTS IN CHAD

In Feb 2006, Chads parliament loosened the spending restrictions, leading the

World Bank and Exxon to freeze the account in which Oil revenues ($20-25m a

month) were deposited.

In July 2006, under threat from Chads government to shut down production and

nationalize the Oil fields, the World Bank agreed to an MOU that set a target of

70% of the 2007 budget to be allocated to priority sectors, while waiting for a

poverty-reduction program. Chads government now controls 30% of the oil

revenues, instead of the 13.5% initially agreed.

In Sept 2006, Chevron and Petronas agreed to pay 281m in taxes to the

Chadian government which, the companies say, were owed to Chad. They were

under threat of expulsion from Chad.

In Jan 2007, EnCana, a Canadian oil company, announced the sale of its Chad

operation to China National Petroleum. The Chinese oil giant is said to be in

negotiations with the Chadian government for a new pipeline

In Sep 2008, the World Bank stopped its commitment, after it became evident

that the arrangements that underpinned the Banks involvement () were not

working. The Chad government paid in advance the remainder of the loanSIB - MSc - S3

15

THERE IS HOPE

SIB - MSc - S3

16

THERE IS HOPE (CONT)

SIB - MSc - S3

17www.moibrahimfoundation.org

BUILDING

MIRACLES


18SIB - MSc - S3

THE MIRACLE IN EAST ASIA

RAPID AND SUSTAINED GROWTH FROM THE 1960S

Region,

country

Per capita Income

(103 1985 US$)Growth rates, 1960-94

1960 1990 GDP Pop Lab force

China 0.6 1.3 6.8 1.8 2.3

E. Asia (exc. China) 0.9 3.6 6.8 2.2 2.5

Korea 0.9 6.7 8.5 1.7 2.6

Singapore 1.6 11.7 8.3 1.7 2.7

Taiwan 1.3 8.1 8.7 2.1 2.7

South Asia 0.8 1.1 4.2 2.3 1.9

Africa 0.6 0.7 2.9 2.8 2.6

Middle East 1.9 3.0 4.5 2.9 2.9

Latin America 2.4 4.1 4.2 2.4 2.7

Industrial countries 6.4 14.9 3.5 0.9 1.1

SIB - MSc - S3

19

Source: Bosworth and Collins, 1996

LEARNING FROM EAST ASIA

CAPITAL ACCUMULATION

Region and country

Average years of schooling AGR 1960-

94

1960 1994

China 1.7 5.3 3.5

East Asia 2.7 7.2 3.0

Korea 3.2 9.7 3.3

Singapore 3.0 6.1 2.1

Taiwan 3.2 8.2 2.8

South Asia 1.3 3.4 2.8

Africa 1.6 3.5 2.4

Middle East 1.4 4.9 3.8

Latin America 3.0 5.5 1.8

Industrial countries 7.3 9.8 0.9

Region and country

AGR capital stock Invest (%GDP)

China 6.7 20.5

East Asia 9.9 18.6

Korea 12.6 23.7

Singapore 13.1 31.2

Taiwan 12.2 21.9

South Asia 5.2 11.3

Africa 4.8 9.5

Middle East 7.1 12.6

Latin America 5.4 16.9

Industrial countries

4.5 24.5

SIB - MSc - S3

20

LEARNING FROM EAST ASIA

MACROECONOMIC STABILITY:

Re

gio

n a

nd

C

ou

ntry

Bu

dge

t(6

0-9

2)

Infla

tion

(60

-92

)

FX

ap

pre

c.

(60

-92

)

Bla

ck

Mk

t Fx

pre

m.

HK (72-91) - 8.8 - -

Korea -1.0 12.0 -1.9 17.7

Singapore 2.2 3.5 -2.5 0.8

Taiwan -1.3 5.8 0.0 6.6

South Asia -6.0 9.0 -2.4 114

Africa -5.5 26.9 -1.8 76.7

Middle East -5.4 13.5 -2.0 62.3

Latin America -3.8 121.0 -1.1 36.2

Industrial countries -1.6 7.9 0.2 1.8

SIB - MSc - S3

21Source: Bosworth and Collins, 1996

MARKET INSTITUTIONS AND THE ASIAN MIRACLE

COMPETITION THOUGH GLOBALIZATION

Share of Four Tigers in developing economies exports

year 1965 1980 1990

All goods 6.0 13.3 33.9

Manufactures 13.2 44.9 61.5

Source: The East Asian Miracle, World Bank

SIB - MSc - S3

22

Active policies for export-push (beyond free-trade)

Export success for credit allocation and other rewards; Easy access to imports for

exporters (free trade zones); Export financing and support of trade missions; Exchange

rate focused on competitiveness (continues with the undervaluation of RMB)

Other market institutions varied and were adjusted to context

FDI (discouragement in Korea, intense subsidies in Singapore)

Industrial structure (keiretsu in Japan, small firms in Taiwan)

Ownership (state-owned in Singapore, family business in Taiwan, Chaebol in

Korea)

SOCIETAL INSTITUTIONS AND THE ASIAN MIRACLE

GROWTH WITH DISTRIBUTION

SIB - MSc - S3

23

Compared to Latin America, East Asian countries

Started from already more equal distributions

Achieved stronger declines in inequality

Achieved higher growth rates

Where these facts related?

Source: The East Asian Miracle, The World Bank

Least equal third

Middle third

Most equal third of sample

Ranking by Gini Coefficient,

1980

Change in inequalit

y (

Gin

ico

efici

ent)

fr

om

1960s t

o 1

980s

Chile Brazil

Rep. of Korea

Taiwan

Singapore

Hong KongIndonesia

Malaysia

ThailandColombia

Philippines

Venezuela

Mexico

Argentina

Peru

GDPpc growth rate (average, 1965-90)

0

-0.2

0 0.01 0.02 0.03 0.04 0.05 0.06 0.07

-0.1

0.1

SOCIETAL INSTITUTIONS AND THE ASIAN MIRACLE

SHARED GROWTH MEANS HIGHER GROWTH

Sources of shared growth

Full-employment: flexible labor markets and

labor-intensive specialization

Universal primary and secondary education

Improvements in the rural sector

Land reform, infrastructure, low taxation

Active social policies

Bumiputra policies (Malaysia)

Socialized housing (Singapore)

SIB - MSc - S3

24

Increased legitimacy

Promote development

Social peace

High Growth

High Growth Low risk for investment Lower credit constraints for the poor

INSTITUTIONS TO CREATE FUNCTIONING,

SUSTAINABLE, COMPETITIVE, OPEN MARKETS

Societal Institutions

Focus on shared growth to ensure widespread support

Societal commitment to development

Market Institutions

Openness, predictability and pro-business approach to facilitate business

Competitive, meritocratic environment with heterodox and gradual market-based reform, stressing local conditions and history

Commitment to globalization and external markets

Governance Institutions

Authoritarianism with legitimacy (political contract for growth)

Technocratic insulation and high quality civil service for policy making

The challenge of democratization, after economic success

SIB - MSc - S3

25

LEARNING THE RIGHT LESSONS FROM ASIA

Included in the Washington Consensus

Macroeconomic rigor

High investment and education

Missing from the Washington Consensus

Shared growth and distribution to tackle inequality and ensure support

Political stability and authoritarian-technocratic rule to engage in

appropriate policies and pursue reform

Openness, predictability and pro-business approach to reduce costs of

doing private, global business

Export-Push

SIB - MSc - S3

26

INSTITUTIONS: DRIVING

DEVELOPMENT IN THE 21ST

CENTURY


27SIB - MSc - S3

THE SUSTAINED MIRACLES IN THE GROWTH REPORT (2008)

SIB - MSc - S3

28

Countries which grew at an average rate higher than 7%, for a period larger than 25 years

Source: The Growth Report, 2008

Only six of these economies grew to become first-world countries.

Macroeconomic stability

Modest inflation Sustainable public

finances

Future orientation High investment

High savings

Openness Import knowledge

Exploit global demand

Market price-based allocation of resources

With institutions that support markets

Leadership and governance

Credible commitment to growth and inclusion

Capable administration

THE FEATURES OF HIGH, SUSTAINED GROWTH

IN THE GROWTH REPORT (2008)

29

Source: The Growth Report, 2008

Macro Stability Investment Internationalization

Institutions: markets, governance, social cohesion

50 YEARS OF TRIAL AND ERROR

Growth Engine 1: Investment

Investment is NOT correlated with growth in many specifications, which seems surprising until we consider that investment only stimulates growth when there are economic opportunities and incentives to run businesses productively.

Growth Engine 2 Macroeconomic Policy

During the 1980s, much foreign aid was made conditional on reform, but the effects of policies choices turned out to be contingent on historical and institutional frameworks.

Growth Engine 3: Institutions

From the 1990s, development experts have focused on the role of social capital, trust and institutions as barriers to economic development. Institutions are key for governance, social contracts and market activity.

SIB- Lisbon MBA S1

30

Easterly (2002), Shirley (2008)

Governance

Political stability & accountability

Protection from rulers

(property rights, rule of law)

Appropriate policy-mix

Reform implementation

Market enablers

Reduce barriers to formal economy

Lower transaction costs

Facilitate business trust

Social contract

Sharing of gains for social

engagement

Social mobility

Safety nets

INSTITUTIONS TO SUPPORT LONG-RUN

GROWTH

31SIB - MSc - S3

MEASURING INSTITUTIONS, HELPS FOSTER REFORMGovernance Market functioning

IMF DataWorld Bank Governance Indicators 2010

Range -2,5 to 2,5Doing Business Indicators 2010, IFC

Country

GD

P p

er

ca

pit

a P

PP

Po

liti

ca

l S

tab

ilit

y a

nd

Ab

se

nce

of

Vio

len

ce

/Te

rro

rism

Go

vern

me

nt

Eff

ecti

ven

ess

Ru

le o

f La

w

Co

ntr

ol o

f C

orr

up

tio

n

Sta

rtin

g a

Bu

sin

ess -

Co

st

(% o

f

inco

me

pe

r ca

pit

a)

Ge

ttin

g E

lectr

icit

y -

Tim

e (

da

ys)

Re

gis

teri

ng P

rop

ert

y

-Tim

e (

da

ys)

Pa

yin

g T

axe

s-Tim

e (

ho

urs

pe

r ye

ar)

Tra

din

g A

cro

ss B

ord

ers

-Tim

e t

o e

xpo

rt (

da

ys)

En

forc

ing C

on

tra

cts

-

Tim

e (

da

ys)

Singapore 56.708 1,1 2,2 1,7 2,2 0,7 36 5 84 5 150

United States 46.900 0,3 1,4 1,6 1,2 0,7 68 12 187 6 300

Germany 36.013 0,8 1,6 1,6 1,7 4,7 17 40 196 7 394

Russia 15.657 -0,9 -0,4 -0,8 -1,1 1,8 281 43 320 36 281

Brazil 11.314 0,0 0,1 0,0 0,1 6,9 34 39 2.600 12 731

Philippines 3.920 -1,6 -0,1 -0,5 -0,8 21,6 50 39 195 16 842

Guinea-Bissau 1.087 -0,8 -1,0 -1,4 -1,1 183,6 455 210 208 23 1.715

Mozambique 1.011 0,3 -0,5 -0,5 -0,4 19,3 87 42 230 23 730

Zimbabwe 436 -1,2 -1,6 -1,8 -1,4 353,8 125 31 270 53 410

SIB - MSc - S3

32

GOVERNANCE AND POLITICAL STABILITY

SIB - MSc - S3

33

http://www.elmundo.es/elmundo/2006/11/29/internacional/1164761342.htmlhttp://www.elmundo.es/elmundo/2006/11/29/internacional/1164761342.html

TRANSPARENCY AND CITIZEN

EMPOWERMENT

SIB - MSc - S3

34

ACCOUNTABILITY AND THE

FUNCTIONAL STATE

SIB - MSc - S3

35

Democratic governance is one of

the keys to development. It is now

acknowledged that political

processes, regulations and

institutions play a major role in

economic growth and human

development. The fight against

poverty is not simply a social,

economic and technical objective

but also a political and

institutional goal.

Corruption is Public Enemy Number

One in Developing Countries, says

World Bank Group President Kim

we are integrating democracy

programming throughout our core

development work, focusing on

strengthening and promoting human

rights, accountable and transparent

governance, and an independent and

politically active civil society across all

our work.

DEMOCRATIC GOVERNANCE ON THE ROAD TO

GROWTH

36

REFORM IN GEORGIA

Corruption and brutality at the core of

Georgias policing system

Police were paid miserably, and were

financed mostly through the

collection of bribes.

A 2000 survey estimated that when

stopped by traffic police, motorists

were asked for bribes in 7 out of 10

contacts. Part of these bribes were

then paid to supervisors,

People were afraid to mention minor

infractions, such as unruly teenagers

breaking windows, for fear that

culprits would be tortured in

detention.

In 2003, in a single day, the government fired and took off the streets 16,000 officers, who were compensated with two months pay.

College educated were recruited and trained, and paid a salary ten times higher. Later, less educated officers were hired.

Undercover officers and mystery clients were assigned to make sure the police followed the rules.

A 24-hour hotline and cameras were installed throughout the city

Police were given new, slick uniforms, buildings were renovated and a public relations campaign was run

SIB - MSc - S3

37

The World Banks 2012 Doing Business rankings placed Georgia at the 16th easiest place for a company to do business, up from 112 in 2005.

In 2005, Georgia ranked 130 out of 158 on Transparency Internationals Corruption Perception Index, but 64 in the 2011 analysis.

Other than the Baltic countries which have EU membership, no other former Soviet country ranked above 110.

RESULTS IN GEORGIA

SIB - MSc - S3

38

Challenges of market-based

institutions, policies and growth

strategies

It is hard to know how to

replicate the historical

successes.

Leadership and enlightened

technocrats, subject to

external control play a key

role.

Institutions that make

markets and societies

function take time and must

adjust to context.

How to make progress?

The correct response to

uncertainty is not paralysis, but

experimentation.

Reform to improve the

effectiveness of government

institutions

Focus on growth and not just

on reforms. Establish priorities

and assess the impact on

growth

INSTITUTIONAL REFORM IS CHALLENGING AND

MAY BE SECOND ORDERTHE GROWTH REPORT (2008)

39

DEMOCRACY AND DEVELOPMENTECONOMIC GROWTH IN THE 1990S, WORLD BANK (2005)

() Policies fail when citizens cannot hold politicians accountable for

poor performance and when governments cannot make credible

commitments. Credible, sustainable reform depends on the checks and

balances provided through political institutions.

Democracies are not the only means to hold governments accountable and

ensure stability: broad-based political parties can in some circumstances

substitute for democratic checks and balances in one-party states.

In cross-country studies, democracies do not outperform autocracies, but

have lower volatility and protect citizens from extreme abuses (Rodrik,

2000; Sen, 1981)

Elected governments are likely to make bad policies: when citizens

are badly informed, when political competitors cannot make credible

promises to voters and when society is polarized.

SIB - MSc - S3

40

0

0 10 20 30 40

GD

P P

er

Ca

pit

a (

PP

P)*

Convergence Path

after take off starts

China Japan

Korea

Singapore

Years after take off starts

Re

ba

se

d t

o m

atc

h

leve

l in

ye

ar

0THE (CONTINUING) EAST ASIAN MIRACLE

CHALLENGES THE INSTITUTIONAL VIEW

41

UNBUNDLING GOVERNANCE

42

A DYNAMIC VIEW OF

INSTITUTIONS


43SIB - MSc - S3

AS CATCH-UP OCCURS, ACCOUNTABLE, OPEN

GOVERNANCE BECOMES CRITICAL

A critical determinant of growth for emerging

markets is the accumulation of capital. Miracle

countries have Investment rates over 27%

Period: 1980-2010

-5

0

5

10

10 20 30 40

Gro

wth

GD

P p

er

ca

pit

a

(%)

Investment in physical capital (% of

GDP)

Investment and Growth

China

SingaporeIndia

Korea

USA

Brazil

Niger

Chile

Venezuela

Botswana

Mauritania

FranceSierra Leone

Investment (in physical

and human capital) gives

way to innovation (R&D).

Open governance

supports creative-

destruction.

Slower growth reduces

popular support. Popular

support empowers

reforming governments.

Wealthier citizens

demand Freedom and

Accountability.

-2

-1,5

-1

-0,5

0

0,5

1

1,5

2

250 680 1847 5021 13650 37103

Insti

tuti

on

al

Qu

ali

ty

GDP Per Capita (2010)

China

Singapore

UAE

Norway

USA

Greece

ChilePoland

Saudi Arabia

Russia

Venezuela

BrazilNamibia

Indonesia

India

NigerLiberia

Source: Fats and Mihov (HBR 2009)

Oil Producing Countries

INSTITUTIONS AND THE MIDDLE INCOME TRAP

45SIB - MSc - S3

-2

-1

0

1

2

640032001600800 12800 25600 51200

Inst

itu

tio

na

l q

ua

lity

Income per capita

Developing

Country

Emerging

Market

Advanced

Economy

Source: Fatas and Mihov (HBR 2009)

GOVERNANCE REFORM HELPS SUSTAIN GROWTH

TO OVERCOME THE MIDDLE INCOME TRAP

46SIB - MSc - S3

-2

-1

0

1

2

640032001600800 12800 25600 51200

Inst

itu

tio

na

l q

ua

lity

Income per capita

China

1970

China

2012

EU, US 2012

Poland

1990

Poland

2012

Source: Fatas and Mihov (HBR 2009)

GOVERNANCE REFORM HELPS SUSTAIN GROWTH

TO OVERCOME THE MIDDLE INCOME TRAP

47SIB - MSc - S3

Escaped

Poland

Hungary

Korea

Taiwan

Chile

Risky

China

Singapore

Brazil

Caught

Argentina

Russia

Venezuela

CAUGHT IN A TRAP

48

Initial conditionsLower income per capita provides the potential for catching up. Poor countries can grow faster when they

set on a convergence path to the rich economies

Imitation>

Innovation

Incentives to imitate and adapt external know-how allow technological catch up to the knowledge

frontier, contributing to rising productivity. As catch-up closes in companies must begin to innovate.

Investment

A key contribution to convergence is the building up of the capital stock. This requires high investment rates,

financed by domestic or external savings. Miracles countries have investment of over 26-28% of GDP

(Korea:35%).

In addition to physical investment, it is important to invest in human capital. The quality and quantity matter.

International

exposure

Countries that are more open to international trade and investment can import new technologies, knowledge

and capital from other countries.

The competitive pressure of global markets forces domestic producers to shape up and eke out productivity

gains.

Competition

A competitive environment creates the incentives to improve firm performance, in order to assure

survival and increase returns.

Markets also operate as a selection mechanism, cleaning out low productivity, firms, permitting the growth

of more productive firms with better products, and opening the space for new innovate firms. This process of

creative destruction stimulates innovation and increases mean productivity.

Macroeconomic

stability

Macroeconomic stability, with low and stable inflation and market-based exchange rates, is critical to

provide a stable environment for investment

Institutions

Institutions include market enablers, governance and social cohesion. They have been driving development

since the Industrial Revolution. Open and strong governance Institutions are critical for countries at the

frontier, where growth is driven by Innovation and Creative Destruction. During catch-up, effective and

stable, governance and market Institutions must support political and economic stability to foster sizable and

productive Investment.

THE DRIVERS OF GROWTH FOR EMERGING MARKETS

49

WHAT ARE THE DRIVERS OF

UNDERDEVELOPMENT IN CHAD?

Ethnical fragmentation

Civil unrest

Political instability

Poor infrastructure (road, electricity)

Low education

Inefficiency from government intervention

Poor macroeconomic policies

Over indebtedness

Interference by France

Difficulties of the international trading system

SIB - MSc - S3

50

Political Institutions

Access to Capital

Poor economic policies

External intervention

Documents

Session3 - MSc Spring2015 (1)