In the Wake of the Crisis : Leading Economists Reassess Economic Policy
V. Growth Strategies
- International Monetary Fund
- Published Date:
- March 2012
Questions: How Should the Crisis Affect Our Views of Growth and Growth Strategies?
Income Distribution and Growth
The economic crisis that began in 2008 was preceded by a long period of high growth and rising income inequality. This was true in both advanced countries and emerging-market countries. The distribution of wages widened. The share of profits increased. The share of income going to the top 1 percent increased even more.
These patterns raise important and well-understood issues of equity. They also potentially raise issues of efficiency. Some argue that the increase in income inequality was at the source of the large decrease in household saving in the United States as people tried to maintain consumption growth by borrowing. Some argue that the emergence of a middle class in China is essential to the development of more advanced products where technological progress is higher.
If the diagnosis is correct, can the problem be handled through conventional policies, or does it require a more dramatic reassessment of the growth model and of institutions?
Catch-Up, Export-Led Growth, and Industrial Policy
Precrisis, countries far from the technology frontier were catching up with those at the frontier. Growth rates were much higher in emerging-market countries than in advanced countries. This is clearly a desirable development, but it raises a number of issues.
Many emerging-market countries followed an export-led growth strategy—a low exchange rate, associated with low domestic demand; a large manufacturing sector, associated with technology transfer; and high productivity growth. The strategy has worked well in many countries. Should they continue or shift to domestic demand? Should they be allowed to continue? Or should it be seen as a form of unfair competition and treated as such? Are there ways of following a similar strategy without running large current-account surpluses (along the lines of Dani Rodrik’s work)?
Some advanced economies, especially in Europe, are experiencing very low growth. Most of them are close to or at the technology frontier. Can their growth rates be substantially increased?
In 2004, Paul Samuelson argued that technology transfer could make advanced countries strictly poorer. The argument was largely dismissed by trade economists on the grounds that it implied a decrease in trade, which we have not observed. Could it be that the effect, although not dominating now, is present and even increasing in strength, with important implications for growth in advanced countries?
Industrial Policy and Growth
One lesson that has been learned from the crisis is that unfettered markets do not always work best. In many countries, there is increasing talk of industrial policy. Should we revise our views about the pros and cons of industrial policy (for example, along the lines advocated by Philippe Aghion)? How does the case for industrial policy depend on how far a country is from the technology frontier?
Institutions and Growth
Emerging countries have generally done better than advanced countries in the current crisis. After suffering a sharp decline in trade and, in many cases, sharp outflows, they have returned to growth and, in some cases, to their precrisis output path. Conventional wisdom is that they had better institutions (in part, due to the lessons from past crises) and better fiscal policy (better than in the past but better than advanced countries?). Are these the sources of their better performance? Was the extent of financial integration relevant to the outcome?
Financial Liberalization and Growth
The crisis has shown the tradeoff from financial liberalization—more efficient intermediation but higher risk. If we take it as given that regulation will always remain one step behind financial innovation, should we revisit the benefits and costs of financial liberalization and of financial openness for growth?