Sustaining the growth takeoff II

A CHAPTER of the IMF’s World Economic Outlook released last week and presented at a series of seminars in Manila analyzes growth takeoffs in dynamic emerging markets and developing economies during the past 60 years. The chapter considers the economic and structural conditions and policies of emerging markets and developing countries that have taken off and thus provides key policy lessons for dynamic economies like the Philippines, on how to sustain its growth takeoff. The summary of the chapter below is a more selective and cross country companion piece to last month’s column sustaining the growth takeoff I.

This chapter finds that the frequency of growth takeoffs in emerging markets and developing economies has markedly risen over the past two decades, and these takeoffs have lasted longer than those prior to the 1990s. The economic structure has not mattered much in embarking on takeoffs — takeoffs have been achieved by resource-rich, manufacturing-oriented and other emerging markets and developing economies. This suggests that the Philippines’ abundant mineral resources and relatively smaller manufacturing sector need not be viewed as an obstacle to sustaining a growth takeoff.

A striking common feature of recent and earlier takeoffs is that they have been associated with pick-ups in investment and national saving rates and increases in export growth. This sets them apart from emerging markets and developing economies that were unable to take off, and confirms the key role of capital accumulation and trade integration in development. Although both the current and previous generation of takeoffs coincided with strong investment growth, they differed significantly in how the saving-investment gaps were financed. A larger share of current account deficits was financed by FDI flows for the current generation of takeoffs compared with the previous generation. More reliance on FDI and greater macroeconomic policy discipline have fostered similarly strong growth but lower inflation after takeoff relative to dynamic emerging markets and developing economies in the previous generation. In the Philippines’ context, persevering with prudent macroeconomic policies and relaxing limits on foreign ownership could substantially raise FDI.

Competitiveness and export growth are important for growth takeoffs. Both today and in the previous generation, emerging markets and developing economies with takeoffs experienced stronger export growth than countries with weaker growth, particularly to other emerging markets and developing countries. Related to the above, export structures were also more diversified in the dynamic emerging markets and developing economies of both generations than in those with weak growth. In the case of the Philippines, fostering greater export growth through ASEAN trade integration and further diversification to agri-processing, business process outsourcing, and responsible development of mining resources hold promise.

Importantly, the post-1990 takeoffs are also associated with a faster pace of implementation of productivity-enhancing structural reforms. Dynamic emerging markets and developing economies in both generations tend to have smaller governments, lower regulatory barriers (proxied by the level of regulation in business, labor, and credit markets), better infrastructure, and higher human capital levels (proxied by the number of years of schooling) than countries with weaker growth. This suggests that structural reforms undertaken over the last 20 years or so in the Philippines would have been critical in supporting economic growth. The emphasis of the Philippine Development Plan on improving the business climate, upgrading infrastructure and expanding social services are also the right areas of focus.

Turning to the role of social and political institutions in underpinning growth takeoffs, the findings suggest that today’s dynamic emerging markets and developing economies performed better on these institutional measures compared with both emerging markets and developing economies with weak growth and before the 1990s. The chapter analyzed the evolution of economic and political inclusiveness, as proxied by the degree of income inequality and the degree of control over the executive, respectively. The Philippines government’s focus on inclusive growth and good governance is therefore appropriate in this regard.

If today’s dynamic emerging markets and developing economies like the Philippines, succeed in preserving their improved policy foundation and structural reform momentum, they are more likely to stay on course and avoid the reversals in economic fortunes that afflicted many dynamic economies in the past.

The author is the IMF Resident Representative for the Philippines. The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.
– See more at: http://www.bworldonline.com/content.php?section=Opinion&title=Sustaining-the-growth-takeoff-II&id=69113#sthash.a6G27KAs.dpuf