The Foreign Service Journal, June 2006

Sources of Economic Growth So what generates economic growth? The short answer is that business enterprises do it by finding ways to be more productive — whether through better technolo- gy, better management practices, or investment in people and equipment. Government policies do not cause eco- nomic growth, but they do set the environment that either encourages or discourages it. The macroeconomic and microeconomic environments enterprises face can, with mild overstatement, be called the drivers of economic growth, because by addressing them the efforts of gov- ernments and donors are most likely to enjoy success. Other things that donors help governments do — educa- tion, HIV/AIDS treatments, family planning or any of a variety of other activities — should be thought of as enablers of economic growth. Where the drivers are in place, improvements in the enablers will speed growth. If the drivers are absent, improvement in the enablers will improve human welfare, but will not end dependence on continued donor funding. There has been great progress on the macroeconomics of development over the past two decades. Nearly all countries accept the general principles that central banks ought to have the goal of low inflation, that government fiscal deficits ought to be modest, that exchange rates ought to be competitive, and that barriers to international trade ought to be modest. These four are all features of the “Washington Consensus,” and no alternative policy set has gained much traction. Nearly all countries agree with them in principle, if not in practice. But practice has also improved. For 2003, the World Bank’s World Develop- ment Indicators database shows that 119 countries had single-digit inflation in that year, and only 30 countries had higher rates —with the highest at 95 percent. The medi- an inflation rate was 3 percent. In 1990, by contrast, only 70 had single-digit inflation, while 65 countries had dou- ble-digit inflation or higher. There were five with triple- digit inflation, and four more with quadruple-digit infla- tion. The median inflation rate for the 135 countries reporting data for 1990 was 17 percent. On the microeconomic side, however, no simple per- formance measurements or recipes for success have been devised. Microeconomics addresses the role of incentives and markets at a level that tends to be specific to individ- ual countries, markets and productive sectors. Conse- quently, the importance of any problem area (e.g., price controls on agricultural products or taxes on exports) will vary widely from one country to another. In crude terms, macroeconomic policy recommenda- tions can be fashioned in Washington; but microeconom- ic policy needs to be made in-country, with an under- standing of local institutions and the political economy of reform. The lack of easy measurement and generalization from first principles has led successive generations of economists to largely ignore microeconomic problems and concentrate on the easily modeled and easily mea- sured macroeconomic issues. Following the dictum of their quantitative-minded professors in graduate school that “if you can’t count it, it doesn’t count,” they have con- centrated on the countable macroeconomic features. Only recently has the microeconomics of development begun to yield to quantitative analysis, with pioneering efforts by groups like the Heritage Foundation and the World Economic Forum. Still, these early efforts provid- ed only extremely crude estimates of the quality of the microeconomic environment for economic growth. Spotlight on Microeconomics In 2003, the World Bank made a breakthrough with its Doing Business database (http://www.doingbusiness.org). It offers annual data for 150 countries on 39 variables that seem most linked to economic growth at the level of the individual enterprise, including information on such mat- ters as: How difficult is it to start a business? How much will it cost? How hard is it to enforce a contract if the other partner simply refuses to pay? How difficult is it to hire a new worker? To dismiss a worker? Is there a cred- it bureau that keeps track of the willingness of borrowers to repay loans? If a borrower defaults, what recourse, if any, does the lender have? Dozens of other questions that impinge directly on the ability of firms to create value, to employ workers productively and, generally, to increase productivity in a poor country are covered. Perhaps the most notable fact demonstrated by this new information resource is that government regulation of business is dramatically more extensive, more expen- sive and more time-consuming in poor countries than in rich ones. On most issues, the United States and Sweden are both far more permissive about virtually any aspect of business than the average poor country. The table on p. 39 is extracted from the Doing Business database. It presents a sampling of the 39 indicators com- paring the United States and Sweden with large develop- ing countries in Asia, Africa and Latin America. The F O C U S J U N E 2 0 0 6 / F O R E I G N S E R V I C E J O U R N A L 37