Economic Growth and Development: Perspectives for Policymakers: A Summary of the 2006 Philadelphia Fed Policy Forum

By Mester, Loretta J. | Business Review (Federal Reserve Bank of Philadelphia), Fall 2007 | Go to article overview

Economic Growth and Development: Perspectives for Policymakers: A Summary of the 2006 Philadelphia Fed Policy Forum


Mester, Loretta J., Business Review (Federal Reserve Bank of Philadelphia)


Most economists agree that economic growth is the driver of a country's standard of living. But what drives economic growth? What programs and policies are effective at promoting economic development and the reduction of poverty and how is effectiveness best determined? Have there been unforeseen consequences of policies that we need to bear in mind when designing new programs? These were some of the questions addressed in the 2006 Policy Forum.

Charles Plosser, president of the Federal Reserve Bank of Philadelphia, provided opening remarks. He pointed out that while the developed world has spent trillions of dollars promoting development around the world, the track record has not been entirely positive. In his view, it is important that we recognize and learn from past mistakes, and this means taking a step back to look at the long-run economic impacts of different types of programs. It also means tackling challenging and sometimes controversial issues like corruption, foreign aid, and trade. These were among the topics addressed the rest of the day.

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ECONOMIC GROWTH AND DEVELOPMENT: AN OVERVIEW OF ISSUES AND EVIDENCE (1)

Roberto Zagha, of the World Bank, began the first session with an overview of a World Bank study on development lessons from the 1990s and their implications. (2) In the late 1980s and early 1990s, the World Bank had a sense that to spur economic growth, all governments need do is implement the so-called Washington consensus of financial and trade liberalization, macroeconomic stability, and privatization. However, as the 1990s unfolded, the effectiveness of these policies began to be questioned as countries thought to have improved their policies still suffered from low growth rates. Indeed, although policies improved in the 1980s and 1990s, growth performance was lower than in the 1960s and 1970s. There appeared to be no set formula for success. China and India, which remained relatively closed economies with large public sectors, grew much faster than countries like Brazil, Argentina, and Chile, which had liberalized much faster. The length and depth of the recession in Russia and other countries of the former Soviet Union surprised many, given the improvement in the economic policy regime. Several countries, including those in East Asia, Brazil, and Argentina, experienced financial crises. It appeared that improvements in policy did not necessarily lead to improvements in economic performance, leading the World Bank to conclude that growth

processes are much more complex than it had earlier thought. In addition, since the models underlying certain economic systems are unknown, the response functions to certain policy actions were not necessarily what one expected. The World Bank concluded that there typically needs to be a lot of learning by doing and experimentation until effective policies are implemented.

The World Bank's systematic study of the 1990s combined information from empirical analyses and from practitioners in the field. The study suggests that institutions and history matter and that no two successful outcomes are necessarily alike. Among the study's many lessons is that how macroeconomic stability is achieved is as important as stability itself. As Zagha pointed out, when fiscal deficits are reduced by curtailing investment in infrastructure, there is a clear tradeoff between stability achieved in the short run and longterm economic growth. Another lesson is that trade reforms are not a panacea. They typically require complementary reforms, e.g., exchange rate policies and trade logistics, to he effective, and the gains from trade reforms are not necessarily shared with the poor--income inequality remains an issue. This lesson was also emphasized later in the day by speakers Dani Rodrik and Ann Harrison. A third lesson is that policies should not merely focus on achieving the efficient use of resources (a static concept) but also on expanding productive capacity (a dynamic concept). …

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