Growth: The Long-Term Economic Failure in Developing Countries Mark Weisbrot

Growth Economic growth is important In general, it is even more important for low and middle income countries than for high income countries such as the United States Basic measure: Gross Domestic Product (GDP) per capita Need benchmark: compare growth (and progress) to past decades

Over the last 25 years, there has been a sharp slowdown in economic growth for the vast majority of low- and middle-income countries

As would be expected in a period of reduced economic growth, there has also been a decline in progress on health and education outcomes for the vast majority of low- and middle-income countries

The Economic Failure in Latin America 1980-2005

Economic Reforms Over the Past 25 Years Reduced restrictions on international trade and financial flows Tighter fiscal and monetary policies Privatization of state-owned enterprises Labor market and public pension reforms Abandonment of state-directed industrial policies or development strategies Increased accumulation of foreign reserve holdings

Growth in GDP per capita, Latin America Start of 25-year period

Fuente: Lora, Eduardo (2001) Fuente: Lora, Eduardo (2001). “Structural Reforms in Latin America: What Has Been Reformed and How to Measure it,” Banco Interamericano de Desarrollo.

                                                                             For developing countries, the main selling point of new commercial agreements such as the Free Trade Area of the Americas (FTAA) or the Central American Free Trade Agreement (CAFTA) has been the lure of increased access to U.S. markets.

                                                                             -- But will most developing countries will be able to increase their exports to the United States in the foreseeable future? Problem: US now running an unsustainable current account deficit -- about 6 percent of GDP. This means that the dollar will have to fall, and the markets for exports to the U.S. will shrink. Result: Over the next decade, countries will have to displace others (e.g. China, Mexico) to gain access to a shrinking U.S. market for their exports.

                                                                            

Mark Weisbrot – www.cepr.net                                                                              Mark Weisbrot – www.cepr.net

They may well make sacrifices for no gain.                                                                              Result: Developing country governments should be cautious about making costly concessions in order to gain access to the U.S. market. They may well make sacrifices for no gain.

Policy mistakes have contributed to the growth failure – here are some examples:

China’s reforms are different from those implemented elsewhere Liberalized trade after it could compete in world markets. (Average tariff still over 40 percent in 1992) Gradual and careful transition Banking system dominated by state-owned banks Government shapes and uses foreign investment in accordance with development goals Strict controls over international currency flows

Conclusion Sharp slowdown in economic growth in the vast majority of developing countries Social and human consequences are very important Most of the reduced progress on social indicators probably due to growth slowdown, rather than any increases in inequality Economists and policy makers should be trying to figure out what has gone wrong

Center for Economic and Policy Research Mark Weisbrot weisbrot@cepr.net Center for Economic and Policy Research www.cepr.net