Growth II: The Long-Term

Economic Failure in Developing Countries

CEPR Basic Economics Seminar SeriesMark WeisbrotOctober 6, 2005

Growth II

• Economic growth is important(see Seminar 2)

• 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

Economic Reforms Over the Past 25 Years

• Reduced restrictions on international trade and financial flows

• Tighter fiscal and monetary policies (higher real interest rates)

• 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

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

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

Reading List• Milanovic, M (2005). “Why Did the Poorest Countries

Fail to Catch Up?” Washington, DC: Carnegie Endowment, Carnegie Paper No. 62. http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=17557

 • Milanovic, B (2005). “Worlds Apart : Measuring

International and Global Inequality,” Princeton, NJ: Princeton University Press.

• Weisbrot, M, Baker, D and Rosnick, D (2005). “Scorecard on Development: 25 Years of Diminished Progress,” Washington, DC: Center for Economic and Policy Research. http://cepr.net/publications/development_2005_09.pdf

Reading List (continued)

• Weisbrot, M and Sandoval, L (2006) “Bolivia's Challenges,” Washington, DC: Center for Economic and Policy Research. http://www.cepr.net/publications/bolivia_challenges_2006_03.pdf

 • Weisbrot, M and Cibils, A (2002) “Argentina's Crisis: The

Costs and Consequences of Default to the International Financial Institutions,” Washington, DC: Center for Economic and Policy Research. http://www.cepr.net/publications/argentina_crisis.htm

 • Cibils, A, Weisbrot, M and Kar, D. “Argentina Since

Default: the IMF and the Depression,” Washingon, DC: Center for Economic and Policy Research. http://cepr.net/publications/argentina_2002_09_03.htm

Growth II: The Long-Term Economic

Failure in Developing Countries

Mark Weisbrotweisbrot@cepr.net

Center for Economic and Policy Research

www.cepr.net