Un­ortho­dox poli­cies for un­ortho­dox times

From pro­tec­tion­ism to au­to­ma­tion to cli­mate change, to­day’s global con­text is chang­ing. What does this mean for the de­vel­op­ment strate­gies coun­tries choose to pur­sue? This looks at how to­day’s con­text should in­flu­ence our think­ing.

The Myanmar Times - Weekend - - Business - TIM DOBERMANN FRANCESCO CASELLI

NEW po­lit­i­cal forces, em­brac­ing eco­nomic ide­olo­gies that had been dor­mant for decades, are on the as­cent in many of the main trad­ing and geopo­lit­i­cal pow­ers. The threat of con­flict, both lo­cal and re­gional, is at its high­est since the end of the Cold War. Au­to­ma­tion is caus­ing and is likely to cause ma­jor re­dis­tri­bu­tions of in­come and wealth. Cli­mate change is al­ready af­fect­ing the lives of mil­lions of peo­ple and this trend will only in­ten­sify. In short, the global con­text is chang­ing – does this re­quire ad­just­ments to de­vel­op­ment strate­gies?

This blog looks at each of the above global trends and con­sid­ers how they should fac­tor in the de­sign of de­vel­op­ment pol­icy. Our con­clu­sion is not that de­vel­op­ment strate­gies need to be com­pletely over­hauled. For ex­am­ple, it is still sen­si­ble to seek to jump on global value chains or try to di­ver­sify the sec­toral struc­ture of the econ­omy. How­ever, the un­ortho­dox times we are en­ter­ing cer­tainly seem to call for ad­just­ments on the mar­gin: un­ortho­dox twists to the typ­i­cal de­vel­op­ment model.

Is ex­port-led growth the panacea? Pro­tec­tion­ism is back. A tu­mul­tuous trade out­look, driven by au­guries of a trade war and un­cer­tain de­mand, brings into ques­tion how quickly coun­tries should rush to ex­port to global mar­kets. Greater pro­tec­tion­ist bar­ri­ers re­duce the prof­itabil­ity of ex­port­ing while ma­ture global value chains make it harder for new­com­ers to get a seat at the table. Mean­while, loom­ing in the dis­tance is the thump­ing, metro­nomic rise of ro­bots in au­tomat­ing pro­duc­tion. Their de­ploy­ment will de­liver nu­mer­ous ben­e­fits, chiefly from higher pro­duc­tiv­ity (and ul­ti­mately greater leisure), although the spread of these ben­e­fits will not be even. Low-wage man­u­fac­tur­ers will lose out as pro­duc­tion re-shores to economies with in­fra­struc­ture suit­able for cap­i­tal-in­ten­sive pro­duc­tion. The spec­tre of con­flict and re­gional in­sta­bil­ity –– can close off mar­kets al­to­gether. Given such tur­bu­lence, a safer de­vel­op­ment model might be to look at coun­tries which may have grown less quickly but which have done so by re­ly­ing less on the ex­port of man­u­fac­tured goods.

Role of agri­cul­ture and ser­vices An im­me­di­ate corol­lary is that a rapid struc­tural trans­for­ma­tion into in­dus­try might not achieve the same re­sults in to­day’s world. The next gen­er­a­tion of growth stars might be less in­dus­tri­alised than their pre­de­ces­sors. If a trade war or baked-in value chains ex­clude you from be­ing com­pet­i­tive in the global mar­ket, an op­ti­mal re­sponse might be to re-em­pha­sise the role of agri­cul­ture and ser­vices in order to grow the econ­omy do­mes­ti­cally. Ap­ply­ing the wealth of ev­i­dence of how to im­prove agri­cul­tural pro­duc­tiv­ity and study­ing how the ser­vice sec­tor can cre­ate jobs is one way to keep the econ­omy hum­ming while low­er­ing your ex­po­sure to these global cur­rents.

The risk of de­te­ri­o­rat­ing global trade and cap­i­tal mar­kets also means we should re­visit our stan­dard pre­scrip­tion on the bal­ance of pay­ments. Profli­gacy has real eco­nomic con­se­quences with bad bor­row­ers squar­ing off against mer­ci­less mar­kets. The his­tor­i­cal an­ti­dote has been to err on the side of fis­cal pru­dence. If, how­ever, trends of eco­nomic iso­la­tion­ism or greater risk of con­flict con­tinue, then the con­se­quences of be­ing shunned in global mar­kets are smaller – es­pe­cially if a coun­try is al­ready strug­gling to de­velop its ex­port sec­tor. If de­fault be­comes less costly then coun­tries may be mo­ti­vated to be less cau­tious in their bor­row­ing and be slower to re­duce their deficits. In­stead of tight purse strings, it be­comes more at­trac­tive dur­ing un­ortho­dox times to fi­nance a larger deficit with for­eign bor­row­ing to pur­sue more ex­pan­sion­ary fis­cal poli­cies, par­tic­u­larly if these poli­cies are geared to­wards in­vest­ments in in­fra­struc­ture, ed­u­ca­tion, health, and re­silience to cli­mate change.

Fo­cus on growth fun­da­men­tals It is also im­por­tant to stress which parts of the stan­dard de­vel­op­ment agenda do not change. Although the global out­look is un­set­tled, none of this pre­cludes coun­tries from build­ing up the bread-and-but­ter of de­vel­op­ment: in­sti­tu­tions and in­vest­ments that im­prove the ef­fi­cient use of pro­duc­tive re­sources in a coun­try. Tweaks on the mar­gin might be ad­van­ta­geous in un­ortho­dox times but the case for fo­cus­ing on growth fun­da­men­tals re­mains as sound as ever. The re­wards will be grad­ual, bear­ing fruit not over years but over decades; yet only through sus­tained rises in pro­duc­tiv­ity can eco­nomic growth be main­tained. In­deed, keep­ing a fo­cus on pro­duc­tiv­ity is the best guide to nav­i­gate any sort of time, even un­ortho­dox ones. Tim Dobermann was for­merly Pol­icy Econ­o­mist for Bangladesh, Myanmar, Pak­istan, and Afghanistan, and the the­matic lead for En­ergy. Francesco Caselli is Nor­man Sos­now Pro­fes­sor of Eco­nom­ics at the Lon­don School of Eco­nom­ics and Po­lit­i­cal Sci­ence and the Di­rec­tor of the Macroe­co­nomics Pro­gram at LSE’S Cen­tre for Eco­nomic Per­for­mance (CEP). This opin­ion ar­ti­cle was orig­i­nally pub­lished on the In­ter­na­tional Growth Cen­tre’s blog (www. theigc.org/blog). This piece is part of a 5-part se­ries on un­ortho­dox poli­cies for un­ortho­dox times.

Photo: EPA

A labourer works at a brick kiln fac­tory on the out­skirts of Man­dalay.

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