They say in economics, the questions seldom change. No wonder then that 230 years after Adam Smith?s ?Inquiry?, the World Bank, several major national development agencies and the Hewlett Foundation commissioned 19 top economic policymakers from around the world?including our own Montek Ahluwalia?and two Nobel laureates, who together with another likely Nobel winner included in its working group, to discover the secret of sustained economic growth. The recently released findings of their two-year study confirmed what many suspected?the magic formula for growth continues to elude us.
The Growth Commission?s approach has largely been focused on ?best practices?. Defining ?sustained growth? as annual growth rates exceeding 7% for a phase lasting at least a quarter century, they identify 13 countries which made the cut, with the expressed hope that India and Vietnam may join the club soon. It is confident about one thing?such high growth can happen only in a poor country and only through resource mobilisation?utilising capacity (primarily labor)?rather than through productivity improvement.
Trouble begins in trying to identify the growth drivers that worked for these superstars to develop a DIY kit for others. The 13 winners defy generalisation in almost every socio-economic criterion. The countries range from the minuscule (take Malta) to continental (China); from democratic (Japan) to dictatorial (most of them); from squeaky clean (Singapore) to corrupt to the bones (Indonesia).
Nevertheless, the commission zeroed in on five drivers: full exploitation of the global economy (read export-orientation and openness to FDI); macroeconomic stability; high rates of savings and investment; market-determined resource allocation; and ?committed, credible, and capable governments?. Raise your hand if you disagree with points two, three and five whatever your ideological moorings. As for one and four, if you are surprised, you have not been listening.
To be fair to the commission, it was not its job to find new and surprising sources of growth. One also cannot fault it for failing to come up with a definitive ?to do? list for policy makers. That is just the nature of the beast. Growth is perhaps too sensitive to the right mix of ingredients?with many such optimum mixes? to be figured out empirically by analyzing a couple of hundred national experiences over half a century. Besides knowing what we do not know is useful too. The committee has also been extremely guarded in drawing conclusions. We are reminded, repeatedly, that there is little that one can claim to be either necessary or sufficient for sustained growth; that they are only pointing out the ?ingredients? of growth?the appropriate recipe should be developed by national policy makers; that they realise there are several ways to make a dish, they are just trying to warn us of a few spoilers.
Trouble is that even the five ushers of prosperity the commission identifies, lie in the eyes of the beholder. So Brazil?s trade policy in the 1950s does not compromise openness, nor does MITI?s interference in Japan count as violation of market-based resource allocation. Double-digit inflation in many of these 13 during their growth phases pass as macroeconomic stability. It is also not difficult to find instances of more stringent adherence to these principles with far less spectacular results.
It seems the secret to sustained growth lies in a constellation of drivers, of which the five identified may be a subset. If it is the mix that matters so much and if multiple recipes work?possibly with different ingredients altogether?is there much point at all in producing a partial ingredient list? In any case, prudent policy-making is rarely about dogmas but rather about choice of levels.
More fundamentally, the approach used by the commission to unearth the secrets of growth parallels a common exercise in asset markets. If you analyze the portfolios of investment wizards like Peter Lynch and Warren Buffet to infer their investment mantras and emulate them to beat the market consistently, it is unlikely to work. For one, efficient market purists point out, these successes may be just random. (Not that this convinces too many outside academia?just check the sales figures of investment advice books by successful investors.) In any case, one does not hear of many cases of successful copycat strategies. For one, the world changes, and winning formulas lose their power.
With 150 to 200 countries during the post-war period and with multiple quarter centuries to look for, what are the odds of finding 13 sustained growth cases? The committee insists that these are not ?miracles? but replicable, though it admittedly stops way short of providing the password to the replication process. Perhaps the next important question to ask is how many countries have consciously and successfully replicated foreign success stories. We will probably have to wait for another commission to answer that.
Rajesh Chakrabarti teaches finance at Indian School of Business, Hyderabad