What Is Good And What Is Bad

Armen Martirosyan

"Noravank" Foundation
28 July 2008

To this very analogical question with reference to methods of
long-term economic progress of developing countries a group of
experts headed by the Standford University professor, the Nobel
Prize laureate Michael Spence was making an attempt to answer. Well
known specialists of different spheres from different countries have
analyzed and summarized experience of 118 developing countries and
made it a ground to represent corresponding recommendations. Although
the authors didn’t have an objective to secure high rate of economic
growth in the long-term perspective, however, according to them,
the conclusions made may be useful while working out and carrying
out social-economic and political reforms in developing countries.

For two years of intense work and $4 million allocated by governments
and private sector of different countries was necessary for the
research to be conducted. The volume report was the subject of broad
discussions of different interested organizations, as well as the
UN. I’ll make an attempt to briefly represent the comparatively
important provisions of the research. I hope that the interested
reader will find answers to some actual questions, at least, the ideas
developed will make a ground for their own mediations and conclusions.

One of the main conclusions of the research sounds quite trivial:
Economic growth is important, it is the prerequisite of solving
the other problems of social developments, but, at that, it doesn’t
guarantee their solution. The poorer the country is, the more vital
is economic growth, as this lack or insufficiency brings the solution
of other issues to naught.

The research conclusions on the whole run counter to recommendations
of the paradigm of Washington consensus with regard to necessity of
privatization, liberalization and stabilization. It is corroborated the
importance of micro-economic stability, role of trade and markets for
ensuring economic growth. Nevertheless, the accents on such issues as
privatization of state property, liberalization of trade and markets
of capital are somehow different from the postulates of the above
mentioned paradigm. It is stressed up that after realization of the
above mentioned events the role of the government in formation and
realization of economic policy is not limited at all. Moreover, it
acquires more delicate regulative character and more subtle methods
and instruments of influence.

In comparison with the Washington consensus, this very report also
brings some quantitative recommendations. So, it is supposed that
successful realization of social tasks on the proper level requires
provision of high rate of economic growth and a time frame of at
least 15-20 years. The level of investment is to make at least 25%
of GNP, from 5-7% of which is to be directed to the infrastructure’s
development, at least, 7-8% of GNP.

Financing of the mentioned expenses is to be realized on the account
of local economies, which, in its turn, determines monitory policy. It
is extremely important involvement of cutting-edge technologies into
the country, encouragement of competition, provision of labor-market’s
flexibility, realization of nature-conservative measures. In the report
special attention is devoted to the issues with regard to which both
practical men and theorists still continue arguing. The issues of
possibility and expediency to carry out national, industrial policy,
choice of the regime of regulating the rate of exchange, the extent
of liberalizing markets of capital are subject to such disputes. The
volume of material provides no chance for me to embrace all the
questions; however, I’ll try speaking briefly of the most important
of them.

According to the authors, political-economic aspects continue
determining possibility of the countries’ development in the long-term
or short-term prospective. The experts have analyzed the following
4 groups of indices reflecting corresponding integrated components:
geography of a country, the institutes working, leadership and
consensus in society.

The comparatively tangible component is sure to be the geography
of a country including such criteria as reach resources, access to
the sea and big amount of population. It goes without saying that
the ex istence of the mentioned characteristics is favorable for a
country’s development. At the same time, reach natural resources
is note necessarily guarantee of prosperity. Under other equal
conditions, comparatively high indices of long-term development have
in particular demonstrated less resource-reach countries. The striking
example of it is the comparison made between the countries of Africa
and South America rich with natural resources and the countries of
later development of South-Eastern Asia (Japan, South Korea, Taiwan
(Chinese people’s republic), Singapore). The very last group, in
comparison with the first one, has demonstrated unprecedented results
of development not having any natural resources.

Whether the resource-rich country will become rich or poor in the
long-term perspective is determined by its institutional base. Strong
and effective institutes further carrying out of such a policy
which stimulates stable economic growth and accumulation of national
riches. Weak and ineffective institutes bring to wild exploitation
of natural resources in favor of a narrow group of proprietors to the
detriment of the long-term perspective of a country’s development. The
quality of institutes is determined by the vision and world view of
the people establishing them. According to the authors, the quality
of institutes of developing countries was inversely proportional to
the level of corruptibility of leaders and elite of the ment ioned
countries and in direct proportion to the level of their accountability
and civil responsibility.

It is noteworthy that the quality of institutes is not determined by
the character of political system of the countries under research. In
economy, as well as in politics, it is more important moderations and
counterbalances, which doesn’t suppose their exclusive derivation
from democraticity of the given state system. The report doesn’t
call in question that that economically more developed countries
are in reality more democratic. At the same time, some authoritative
regimes, in comparison with their more democratic "confreres," have
demonstrated higher indices of long-term development. It has come to
prove the hypothesis of the well known sociological school headed by
Samuel Lipest, confirming that to support democracy it is necessary
quite a high level of income of population, at least $6 thousand per
head. Under lower level of income democracy and economic growth become
mutually exclusive. As a result, sooner or later poor countries roll
down to more authoritative regimes.

The report once more confirmed that the role of leadership in ensuring
steady economic growth was very important. In all the structures
realization of the task of long-term economic growth requires
high-professional, unprejudiced and self-denying leaders able to form
quite ambitious but real vision of future, create possibly wider public
consent with regard to such a vision and mobilize the society around
successful realization of it. The research results accentuate the
importance of the leaders’ devotion not to "party or their personal
interests, but exclusively to the national ones." As the report has
come to prove, all the prospering countries have had an obligatory
experience of providing the leaders and bureaucracy with enough, if
not high, remuneration of labor for minimization of corruptive risks.

Another important index influencing on dynamics or quality of growth,
according to the report, is the level of social consensus of society
with regard to a country’s strategy of development and the vision of
its future. By saying this, the experts mean the level of convergence
of interests in different social groups of society.

The report authors confirm that such a phenomenon as "brain drain" is
the comparatively reliable indicator of confidence in to institutes
of the given country. According to them, it is quite high level of
confidence that creates stimulus and grants freedom for emancipation of
personal capabilities of gifted individuals and application of their
talent in their own country. It is not by chance that the highest
level of Â"brain-drainÂ"was recorded in the countries having problems
with steady economic growth.

In the report special attention was paid to so call "most vulnerable"
countries, to which were ascribed the small ones. They think that
small size of national economy makes is diversification extremely
difficult, which, in its turn, determines excessive dependence of such
countries on external factors and economic shocks. To such countries
is recommended maximum integration into the world economy, formation
of regional clubs and outsourcing some function of the government.

Along with confirmation of importance to develop the country’s
infrastructures, the report also represented the analysis and some
recommendations referring to the extent of expenses to develop
infrastructures. Stressing up the difficulty to determine some
universal extent of expenses, however, the report draws some general
conclusions on the basis of analysis of corresponding expenses of
developing countries. So, it is recommended to envisage for about 4%
GNP for the infrastructures’ investment and development, and almost as
much to ensure effective functioning of the ones existing. Restoration
of cost of the infrastructure’s components sharply distinguish for
different branches.

Thus, optimal level of these expenses is relative to the cost of the
whole complex for the systems of production and supply of electrical
energy for motor roads and railways makes for about 2%, for the
systems of water-supply and sewerage – for about 3%, for the system
of telephony – for about 8%.

Since development and maintenance of infrastructures require=2
0constant and considerable expenses, the next important task is to
determine optimal sources of their financing. As the experience has
come to prove, the main burden is on public finances, on the account
of which are realized infrastructural projects. If the field is
privatized, than the expenses are reflected in the cost of services,
which, as a result, determines their availability for population,
and first of all for its most poor strata.

It is interesting that improvement of transport communication on
economic development of regions had quite contradicting influence in
different countries. It is reasoned by elimination of "natural" trade
barriers "protecting" local industry and furthering the solution of
employment problems of the local people. Such a cause-effect relation
is more noticeable in the countries where the population’s level of
expenses sharply differs by regions.

In the report special attention was devoted to the issue of ensuring
competitiveness of exchange courses, successful realization
of which, according to many economists, was the prerequisite of
South-Eastern economic "miracle." At the same time, noncompetitiveness
of exchange courses of the Latin American countries became the
reason of big deficit of balance which brought these countries to
crisis in 1980s. Noncompetitiveness of exchange courses especially
aggravates the situation in the countries subject to so called
"Holland20disease". Rapid export of row materials results strengthening
of national currency furthering the surpassing development of import
and suppressing production and export of industrial output. Such
a development of events, in the end, has disastrous influence
on economics on the whole. According to the authors, support to
competitive courses and corresponding currency policy is very important
for the countries where extraction and export of natural row materials
is of great importance. Corresponding practical recommendations are
given for such countries in the report.

It is quite noteworthy that the report authors represented not only
the measures to be possibly undertaken, but also presented quite a big
list of bad ideas. To the "bad ideas" the authors ascribe financing
of power engineering, solving unemployment problem on the account of
extending state bureaucracy, aggressive reduction of budget deficit,
introduction of price controlling mechanisms aiming at curbing
inflations, prolonged protection of national economy branches from
international competition, underestimation of nature- conservative
measures, low salaries of state officials, lack of bank regulation
and control mechanisms, over-strengthening of national currency
under the conditions of the economy’s unavailability to transfer to
more high-productive industry. It goes without saying that the list
of mistakes singled out in the report is not final and each country
can 9 Cwork out and realize" ungrounded economic policy by itself
with all the harmful consequences to follow. That’s why sober-minded
analyze is the precondition to work out optimal economic policy.

Summing up we may say that from the one hand the report total is
encouraging: the developing countries are in principally able to
ensure quite high standards of life. At the same time, it is once
more confirmed that this problem is quite difficult to solve and
requires contribution and serious efforts of all the components of
the present day society.