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

1. Learning from Developing Country Experience: Growth before and after the 2008-2009 Crisis Ann Harrison NYU Stern School, World Bank and NCAER Conference October 7, 2010

2. 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

3. Before and after the 2008-2009 crisis, developing countries grew faster than industrial ones

4. East Asia and the Pacific Region is Leading per capita GDP Growth; by end of decade, High –income OECD is lagging behind

5. Close-up: higher resilience in GDP growth declines and better prospects for the future for developing countries Real GDP growth rates in percent Source: World Bank, Global Economic Prospects

6. 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

8. A comparison with Previous Crises: Developing Country Performance has been Markedly Superior to Developed Country Performance GDP per capita growth in past and current crises 8.0 6.0 4.0 Growth rate 2.0 World (3 crises) 0.0 World (2009) World (2009) Projected LICs (3 crises) - 2.0 LICs (2009) LICs (2009) Projected - 4.0 - 5 - 4 - 3 - 2 - 1 0 1 2 3 4 5 • 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

9. Consequences: the changing global landscape

10. 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.

11. 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”

12. Source_Fardoust, Kim, and Sepulveda (2010)

13. Return to Normalcy? 1820 versus 2025

14. 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)

15. 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. Thirteeneconomics 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

16. Those that did succeed had high rates of Savings and Investment Lines outside luxury LV store in the US Beijing National Airport

17. Trend in Investment since 1970

18. They also focused on market signals and international competition

19. …Without Neglecting the Important Role of the State Shanghai high speed railway NY Subway

20. And they Promoted Winners, not Losers, raising issues of state capacity USA China LosersAbandoned auto plant Winner Volvo plant in China

21. 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 Aghionet al Dwight D. Eisenhower initiated ARPA, the team of researches that built ARPANET, the earliest U.S. Internet.

22. 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)

23. Rising Inequality in Developing Countries as well…` Source: Atkinson, Piketty, and Saez (2010)

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

25. 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)

26. 3. Lessons on Risk and Vulnerability: What can be done? Financial Risks: 2007 Market Crash

27. Environmental Risks: Earthquake in Haiti

28. Risks from Global Integration: Mexican Industrial Production Before and After NAFTAfrom Nabli (2010)

29. 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.

30. 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”.

31. Provide Social Safety Nets for disadvantagedIndia’s Rural Employment Guarantee Scheme in Bihar

32. One of emerging lessons of financial crisis is that markets do not always work, but misguided interventions can make things worse

33. 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 China • Example 2: Household responsibility system in China

34. Example of gradualism instead of shock therapy: reforms of Chinese public enterprises through joint venture activities and private sector growth

35. 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