Executive Summary:
This paper is the third installment in a series (the first and second editions were in 2001 and 2005) that traces a long-term growth failure in most of the world’s countries. For the vast majority of the world’s low- and middle-income countries, there was a sharp slowdown in economic growth for the two decades from 1980-2000, as compared to 1960-1980. By 2005, the story had still not changed very much.
As would be expected, this long-term decline in growth also brought a decline in progress on social indicators, including life expectancy, infant and child mortality, and education. This was not the result of “diminishing returns,” either in economic growth or in the achievable progress in social indicators, as we showed previously. More likely, it was a result of policy failures. But this widespread, historic long-term slowdown in economic growth and social progress received very little attention or investigation.
The past decade has shown a rebound in economic growth as well as progress on social indicators for many countries. In this paper, which looks at data for economic growth as well as health and education indicators for 191 countries over the last fifty years, we look at the economic performance of the last decade, as well as available social indicators, to see if the long slow-down in growth for the vast majority of countries has finally been reversed.
The question that we raised ten years ago, and is still relevant, is: how much of this growth slowdown can be attributed to the policy reforms that characterized the post-1980 era?1 For most low- and middle-income countries, these reforms included tighter fiscal and monetary policies (including inflation-targeting regimes and increasing independence of central banks); a large reduction of tariffs and non-tariff barriers to trade; financial deregulation and increased opening to international capital flows; privatization of state-owned enterprises; increased protectionism in the area of intellectual property; and the general abandonment of state-led industrialization or development strategies.
Identifying econometrically the contribution of the various reforms to the growth failure would be a daunting and possibly intractable exercise. But the fact that these reforms, often referred to as “neoliberal,” coincided with a sharp, long-term decline in economic growth for the vast majority of low- and middle-income countries is at least prima facie evidence that on the whole, these reforms contributed to the economic failure. It is also striking that so very few countries have, in the last 60 years, caught up with the living standards of Europe, the United States, and the high-income countries that were the first to industrialize. More recently, only three small countries out of 51 — Botswana, the Maldives, and Cape Verde — have moved up from the group of Least Developed Countries since the category was created by the United Nations four decades ago.2 These long-term patterns by themselves suggest that there are barriers and obstacles that have their origin in international relations, rather than simply within countries.
In this paper countries are divided into quintiles according to the level of per capita income, or social indicator (e.g. life expectancy, infant mortality). The three periods are (1) 1960-1980 (2) 1980- 2000 and (3) 2000-2010. It is important to emphasize that we are not comparing the same set of countries in each quintile over the different time periods. Rather, we are comparing all of the countries that start each period (e.g. 1960) at a certain level of per capita GDP or social indicator, with those that start the next period (e.g. 1980) at the same level. This methodology eliminates the possibility that any slowdown in progress is a result of “diminishing returns.”
Economic Growth
For growth in per capita GDP, as noted above, there was a sharp slowdown from the first (1960-1980) period to the second (1980-2000) for all quintiles. At an annual rate, every quintile saw per capita growth that was slower by roughly half — or more — in the second period as compared with the first.
For all except the top quintile of countries — i.e. for the vast majority of low- and middle-income countries — there was a sharp rebound to the growth rates of the 1960-1980 period during 2000-2010.
There are a number of possible contributing factors to the apparent turnaround. First, if the growth failure of 1980-2000 were primarily a result of policy errors, we would expect at least some recovery eventually. For example, the “shock therapy” that Russia and other transition economies experienced in the 1990s was a tremendous failure, especially as compared to the high-growth transition managed by China; but after some of the worst output losses in recorded economic history, there was an economic recovery.
In other cases failed policies were abandoned — for example the fixed exchange rates in countries such as Argentina, Brazil, and Russia that contributed to the crises and output losses of the late 1990s. India’s moves away from the neoliberal policies of overly-high interest rates and an over-valued exchange rate were an important part of its growth acceleration. After the Asian economic crisis of the late 1990s many countries began to accumulate reserves, so as to prevent the liquidity problems that played a major role in the crisis — and also to avoid having to borrow from the International Monetary Fund (IMF), and accept unwanted conditions attached to the borrowing.3
Partly as a result of these developments, the influence of the IMF collapsed during most of the past decade, with its worldwide lending portfolio falling from $105 billion in 2003 to under $20 billion in 2007.4 The IMF, in the prior three decades, had been one of the most important promoters of neoliberal, and often pro-cyclical, policies in low- and middle-income countries. Prior to the past decade, it headed up a “creditors’ cartel” whereby borrowing countries that did not reach agreement with the Fund would not get credit from the World Bank, regional banks such as the Inter-American Development Bank, and sometimes even the private sector.5 This was a very powerful influence on economic policy, and by 2007 it had collapsed.
In 2008, with the world economic downturn, the IMF increased its resources enormously, with its capital tripling from $250 billion to $750 billion. This was an unprecedented level of resources for the Fund, but it did not give the IMF the kind of influence that it had previously had on most low- and middle-income countries. The middle-income countries of Asia and Latin America, for example, mostly remained outside the Fund’s orbit. Instead, the IMF has played a major role in Europe, especially Eastern Europe and the weaker Euro zone countries (Ireland, Portugal, Spain, and Greece). Although the Fund did play a role in the implementation of pro-cyclical policies in many countries during the world economic downturn — a look at 41 agreements at the end of 2009 showed that 31 contained pro-cyclical macroeconomic policies6 — it was considerably more moderated than its role in the past. In many countries the policies were reversed as the downturn worsened. And the IMF also had some positive impact: the Fund’s lending that did not have pro-cyclical or other harmful conditions attached, which was significant in the last few years, made a positive contribution. It is difficult to measure the overall impact of the Fund since the beginning of the world recession, but clearly it did not have anything approaching the negative impact that it had from 1980 to 2000. Also, there was a coordinated intervention by central banks in response to the financial crisis, and expansionary monetary and fiscal policy in many countries, especially in high- income and some middle-income countries, in response to the downturn.
The past decade also saw a lot of bubble growth — with big real estate bubbles in the United States, much of Europe including the UK, Spain, and Ireland, and elsewhere. It was a period of very low real interest rates worldwide, and — until the crash of 2008 — unusually favorable financial conditions. Rising commodity prices also increased growth in many commodity-exporting countries, including in Sub-Saharan Africa. As a region, Sub-Saharan Africa more than doubled its overall (not per capita) growth rate, to 5.7 percent annually for the last decade, from 2.4 percent in the prior 20 years.7
The growth of China also contributed increasingly to world growth in the past decade, as compared to previous decades, as China became the second largest economy in the world8 — and the only economy near its size with a state-led growth strategy. This affected not only regional growth, but also helped to spur growth in many commodity-exporting countries.
The Chinese success story — GDP per capita seventeen-fold over the past 30 years, to $11,918 — cannot be attributed to the reforms that most countries adopted in the post-1980 period. Although both foreign direct investment and exports contributed substantially to China’s growth, both were heavily managed and handled quite differently than in other developing countries. The government has played a major role in shaping investments that would fit in with the country’s development goals. These include such priorities as producing for export markets, a high level of technology (with the goal of transferring technology from foreign enterprises to the domestic economy), hiring local residents for managerial and technical jobs, and not allowing foreign investments to compete with certain domestic industries. China’s policy toward foreign investment has therefore been directly opposed to the major worldwide reforms of recent decades, including the rules of the World Trade Organization; the same is also true in the important area of intellectual property.
The Chinese economy is still, after more than three decades of reform, very much a state-led economy. State-owned enterprises account for about 44 percent of the assets of major industrial enterprises.9 The financial system is state controlled, with the government owning the four largest banks.
India, with more than 1.2 billion people and now the world’s fourth largest economy,10 has also had a fast-growing economy in recent years, with per capita GDP growth accelerating to 8.9 percent annually for 2003-2008. While India’s growth acceleration has not been state-led as in China, it seems that the movement away from two important neoliberal macroeconomic policies are a big part of the story: the country moved toward lower interest rates and a much more competitive exchange rate. The Indian experience does, however, differ considerably from prior late-development experiences in that it has been a net capital importer (as opposed to running long-term trade surpluses as in China or other fast-growing Asian countries); and in the leading role of the expansion of the service sector, both as a share of the economy and exports.
Health and Education
As noted previously, the sharp slowdown in economic growth for 1980-2000 coincided with a significant decline in progress on health indicators. This is to be expected over any long time period since these indicators are correlated with a country’s income per capita. But they are also affected by policy, and it may be that the shift toward neoliberal policy reforms also had some impact in reducing progress on health indicators in the post-1980 era.
Progress in life expectancy fell from the first to the second period for the bottom three quintiles of countries. It rose for all quintiles over the past decade, except the second quintile, which consists of countries that started out with a life expectancy between 48 and 59 years.
The decline in progress during the last decade, for the second quintile, was mostly the result of the HIV/AIDS crisis. This was driven primarily by African countries, including South Africa, Swaziland, and Lesotho, with high rates of HIV infection. Of course it is also important to emphasize that the AIDS crisis is not completely exogenous, and many of the failures of treatment and prevention are policy failures.
There is also a divergence between male and female life expectancy for the lower life-expectancy quintiles, with females doing much worse during the last period. This appears to be the result of the feminization of the HIV-AIDS crisis (with women suffering much higher infection rates), the lack of progress on maternal health, and associated health policy failures.
Adult male mortality shows some relationship to the growth slowdown and recovery for the second and third quintiles. However, for the lowest quintile, there was no slowdown in progress during the 1980-2000 period; rather this came in the most recent decade, again due to the HIV/AIDS crisis.
For adult female mortality, we see the same pattern as for male mortality in the first and third quintiles. But the second quintile shows a decline in progress on mortality across all three periods.
This is also the result of the HIV/AIDS crisis, which has hit women in Africa much harder than men, and with the worst-affected countries in this second quintile.
Infant and child mortality also show patterns related to the growth slowdown and recovery for the bottom three quintiles of countries.
Looking at education spending as a percentage of GDP, there is also a pattern that relates to the growth slowdown and recovery, for the middle three quintiles. For primary school enrollment, we see this pattern only in the bottom two quintiles, with an especially large increase for 2000-2008. This is, at least in part, a result of the end of a policy by the World Bank prior to this decade, of requiring borrowing countries to charge user fees for primary education. For secondary education, there is also a pattern of growth that follows economic growth for the bottom three quintiles.
Looking forward, it is too early to tell how much of the rebound in growth over the last decade will continue. At this moment it is the high-income countries, where the 2008-2009 financial crisis and recession originated — including Europe and the United States — that are most in danger of pursuing pro-cyclical and other harmful neoliberal policies that could produce long-term stagnation.11 Since these countries still make up the majority of the world economy, their policies will continue to have a heavy influence over world growth over the next decade, even though the developing economies have seen a much faster recovery so far. But at the moment it seems that a good part of the developing world has developed a growth dynamic that is capable of achieving fairly rapid growth even as the high-income countries recover relatively slowly.
1 In some countries, e.g. Argentina and Chile in Latin America, the reforms began in the 1970s.
2 ILO (2011) and UN DESA (2008).
3 For more on the decline in influence of the IMF, see Weisbrot (2007).
4 Calculated from IMF (no date a, b).
5 For more on the IMF’s role in the “creditors’ cartel,” see Weisbrot (2006).
6 Weisbrot et al. (2009).
8 The international financial press reported that China became the second-largest economy in the world in 2010, on an exchange-rate basis (see, for example, Barboza 2010 and BBC 2011). However, on a purchasing power parity basis, China rose to the second largest economy in the world in 2001 (IMF 2011).
9 World Bank (2010a, 3, Box Figure 2).
10 This is measured in purchasing power parity terms.
11 For more on current austerity and recovery prospects across countries, see Dean Baker (2010) and Weisbrot and Montecino (2010).
Full Text:
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Mark Weisbrot is Co-Director and Rebecca Ray is a Research Associate at the Center for Economic and Policy Research in Washington, D.C. This report was first published by CEPR in April 2011 under a Creative Commons license.
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