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Learning from Developing Country Experience: Growth before and after the 2008-2009 Crisis

Ann HarrisonNYU Stern School, World Bank and NCAER

ConferenceOctober 7, 2010

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A 20 Minute Roadmap

• Before and After the 2008-2009 crisis, developing countries (average) grew faster than industrial ones

• Consequences: a new global economic landscape• This superior performance carries lessons for industrial

countries. “TORR” framework from Zoellick’s speech last week and DEC strategy paper:– Transformation: stimulating structural transformation– Opportunities: broadening opportunities– Risks: increasing risks and vulnerability– Results: focusing on results in policies and aid impacts

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Before and after the 2008-2009 crisis, developing countries grew faster than

industrial ones

East Asia and the Pacific Region is Leading per capita GDP Growth; by end of decade, High –

income OECD is lagging behind

Source: WDR2012 Outline

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Close-up: higher resilience in GDP growth declines and better prospects

for the future for developing countries

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-4

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10World High-income Middle-income

Real GDP growth rates in percent

Source: World Bank, Global Economic Prospects

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Three Factors make this Crisis very unusual for Developing Countries In

Comparison to Past Crises• The crisis originated in industrial countries and was

transmitted via trade and capital markets.• Many developing countries were able to cushion the

effects of the shock for the most vulnerable through social spending and safety nets due to strong fundamentals prior to the onset of the crisis:• More prudent macro policies (lower inflation, more fiscal space,

higher buildup of reserves) documented by Schmukler (DECRG)• Rapid trade expansion, CA surpluses, and higher growth• Significant aid and reduced debt levels

• Unlike in previous crises, developing countries generally fared much better than developed countries

Source_Fardoust, Kim, and Sepulveda (2010)

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A comparison with Previous Crises: Developing Country Performance has been Markedly Superior to Developed

Country Performance

Note: The figure plots the average per capita GDP growth in the world and in Low-income countries 5 years before and 5 years after the global crises (centered at zero on the horizontal axis) of 1975, 1982 and 1991, and the current crisis. Also shown in dashed lines are WEO projections until 2013. Source: DECPG

GDP per capita growth in past and current crises

-4.0

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-5 -4 -3 -2 -1 0 1 2 3 4 5

Grow

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World (3 crises)

World (2009)

World (2009) Projected

LICs (3 crises)

LICs (2009)

LICs (2009) Projected

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Consequences: the changing global landscape

The Crisis has probably accelerated the shift towards a multi-polar world:

• Developing countries accounted for 17 % of global GDP in 1980. By 2008:– 29 % at market exchange rates– 45 % if purchasing power parity weights are used

• South-South links also rising rapidly. In 1995 Southern trade was 13 % of China’s total trade; by 2007 it was 28 % and is projected to reach 50 % by 2015.

Prediction of Professor John Whalley based on growth projections

“The South seemly may be poised to become the epicenter of trade in the global economy by 2030, with China at its Hub”

12Source_Fardoust, Kim, and Sepulveda (2010)

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Return to Normalcy? 1820 versus 2025

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This superior performance carries lessons for industrial countries.

Linking Lessons to World Bank Research Agenda on:

Transformation: stimulating structural transformation (1)Opportunities: broadening opportunity (2) Risks: increasing risks and vulnerability (3)Results: focusing on results in policies and

aid impacts (4)

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1. Transformation: Remarkably few countries have transformed themselves

from developing to industrial“As a point of departure we review the cases of high, sustained growth in the

postwar period. Thirteen economics qualify: Botswana; Brazil; China; Hong Kong, China; Indonesia; Japan; the Republic of Korea; Malaysia; Malta; Oman; Singapore; Taiwan, China; and Thailand. Two other countries, India and Vietnam, may be on the way to joining this group. It is to be hoped other countries will emerge soon.”

–The Growth Report

Those that did succeed had high rates of Savings and Investment

Lines outside luxury LV store in the US Beijing National Airport

Trend in Investment since 1970

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They also focused on market signals and international competition

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Developing and Developed Countries 1980-2007

High Income Countries

Low and Middle Income Countries

perc

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Source: World Development Indicators

…Without Neglecting the Important Role of the State

Shanghai high speed railway NY Subway

And they Promoted Winners, not Losers, raising issues of state capacity

USA

LosersAbandoned auto plant

WinnerVolvo plant in China

China

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Key Challenge: how to create policies that promote winners, not losers. See Lin (2009) on NSE, Lin and Monga (2010) on GIF, Handbook chapter by Harrison and Rodriguez-Clare (2010) , and Aghion et al

Dwight D. Eisenhower initiated ARPA, the team of researchesthat built ARPANET, the earliest U.S. Internet.

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2. Broadening OpportunitiesHow do we ensure that benefits of growth are shared by all in an increasingly

unequal world?

Rising Inequality in Developed Countries

Source: Atkinson, Piketty, and Saez (2010)

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Rising Inequality in Developing Countries as well…`

Source: Atkinson, Piketty, and Saez (2010)

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Broadening opportunities means promoting access to education, health care, and public services

India

But equality of opportunity may not be enough: in area of gender, vast improvement in equality

of opportunity, but not outcomes

Source: Bertrand, Goldin, and Katz (2009)

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3. Lessons on Risk and Vulnerability: What can be done?

Financial Risks: 2007 Market Crash

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Environmental Risks: Earthquake in Haiti

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Risks from Global Integration: Mexican Industrial Production Before and After NAFTA

from Nabli (2010)Industrial Activity Index in Mexico and USA, 1980-2009

(Seasonal Adjusted Data, Mexico 1993=100, USA:1994=100)

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MéxicoUSA

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Sources: INEGI and Federal Reserve

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Solutions? China is Making Inclusion, Diversification, and Sustainability Top Priorities

In China, the 11th (2006-2010) Five Year plan focuses on correcting five “imbalances” that are considered unsustainable, given the current pattern of growth:

• widening disparities in income between regions, urban and rural

areas, coastal and inland provinces;• unevenness in access to basic social services; • the economy’s reliance on industrial exports and external markets

for growth;• the rapid increase in demand for energy and natural resources; and• a mixed record in improving environmental quality.

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Solutions? Increase transparency and reduce crony capitalism…

Simon Johnson in Atlantic Monthly, May 2009

“elite business interest-financiers in the U.S. played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse”.

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Provide Social Safety Nets for disadvantaged

India’s Rural Employment Guarantee Scheme in Bihar

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One of emerging lessons of financial crisis is that markets do not always work, but misguided

interventions can make things worse

4.Results: A pragmatic focus on what works (and what doesn’t)

• Xiaoping Deng: “Crossing the River by Feeling the Stones”

• This is China’s mode of economic reform, it means implementing partial reforms in an experimental manner and expanding them upon proven success

Example 1: SOE Reform in ChinaExample 2: Household responsibility system in

China

Example of gradualism instead of shock therapy: reforms of Chinese public

enterprises through joint venture activities and private sector growth

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180Evolution of total workforce: 1998-2007 (1998 = 100)

Domestic public firms Domestic private firms Foreign-invested firms

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Concluding Comments(1) Recent crisis has highlighted superior performance of

developing countries, but many issues not addressed by this survey (global coordination of macro instruments and G20, aid, restraints on protectionism)

(2) Superior performance of leading developing countries has changed the global landscape: new growth poles

(3) TORR New framework highlights key research areas :– Transformation: what underlies structural changes?– Opportunities: how can we ensure that benefits of growth are

shared?– Risks: Environmental, Trade, and Financial Risks – Results: A new focus on results and aid effectiveness