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This is an archived USAID document retained on this web site as a matter of public record.
New thinking on drivers of growth
>> Foreign Aid in the National Interest >> >> Chapter 2 Jump to Chapter 2 Sections:
>> New thinking on drivers of growth >> Income inequality is declining >> More trade and investment mean faster growth >> Increasing U.S. imports through the African Growth and Opportunity Act >> A microeconomic agenda for development >> How can the U.S. support growth in developing countries >> Background papers >> References
The record of growth
Economists have developed myriad models to explain the empirical record of growth. The usual prescriptions low inflation, macroeconomic stability, openness to trade, good institutions, government investment, democracy can all be shown to contribute to growth in a certain set of countries or during a certain period. But they are far from a complete explanation.
Specific factors also influence economic growth. Unstable prices for commodity exports slow growth. Avoidance of urban bias in education speeds it up. Trade openness was bad for growth in the 1930s and 1940s, of little importance in the 1950s and 1960s, and highly significant in explaining rapid growth in the 1970s and 1980s.
Rapid growth in the national stock of capital goods (such as infrastructure and industrial machinery) can lift a developing country onto the first rung of the development process. But eventually, total factor productivity efficiency in using capital, labor, and other inputs becomes the main source of higher incomes. This realization led to the knowledge model of development described above. Difficulties in moving to the knowledge model are evident in the growth record of the 1990s. More than a third of the 108 developing and transition economies had lower per capita incomes in 2000 than in 1990. The decade saw some of the fastest growth ever in global output and international trade, indicating that the external environment was favorable to growth. Thus sources of poor performance came from within the countries.
None of the 38 poor performers were affected by East Asia’s financial crisis in the late 1990s. In fact, none were in Asia. Nearly half (18) had been part of the Soviet Union. Africa accounted for another 14 countries. And despite reasonable economic performance for the region as a whole, 4 countries in Latin America and the Caribbean suffered decade-long declines.
Such long-term economic problems point to deep-seated failures to establish the core elements required for modern economic growth: provision of public goods and social infrastructure, of a stable macroeconomic environment, and of a favorable business climate. Why do some governments fail to provide these essentials for growth or even actively undermine them? Modern political economy has tried to answer these questions, but with only modest success.
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Last Updated on: October 07, 2009 |
