Accelerating national economic growth

The need for faster economic growth is undeniable, especially in the third world and especially in those parts of the third world where per capita incomes fell during the 1980s. While there is a need for rapid economic growth to break the poverty trap or reverse economic stagnation, too high a level of economic growth is counter productive, leading to detrimental economic consequences such as hyper-inflation.

Population trends will affect the possibility of accelerating growth in per capita income in the 1990s. There is not a direct relationship between slower growth of population and faster growth of average incomes, but on the whole as the rate of growth slows, the easier it is likely to be to increase the growth of income per head.

A central policy objective during the next decade must be to raise the rate of accumulation of capital and improve its allocation. In a great many countries gross domestic investment actually declined during the 1980s, and that pattern clearly must be reversed if even minimum growth objectives are to be attained. Ideally governments should increase the efficiency of investment so that it at least regains the levels experienced in the 1970s. In addition to a restructuring of output, this may require reform of investment procedures within central government ministries, improved criteria for investment decisions in public sector enterprises and price reforms designed to channel private investment in more socially optimal directions.

Unfortunately it is not enough merely to raise the rate of growth of investment in view of the fact there was a tendency throughout the developing world for the efficiency of investment to decline in the 1980s. In the coming decade it will be important for governments to take what steps they can to increase the efficiency of investment so that it at least regains the levels experienced in the 1970s. In addition to a restructuring of output, this may require reform of investment procedures within central government ministries, improved criteria for investment decisions in public sector enterprises and price reforms designed to channel private investment in more socially optimal directions.

The savings effort in developing countries remained surprisingly large on the whole, the average savings rate being 23.6% of GDP in 1987, or about the same as it was in 1973 before the first sharp increase in oil prices. In sub-Saharan Africa, however, the savings rate was less than half the average in the rest of the Third World - namely, 10.9% in 1987 - and much below the rate of savings achieved in 1973 - namely, 17.5%. In this region a major effort will be required in the coming decade to raise the savings rate to a level compatible with the minimum desired rate of growth. Failure to do so will almost certainly result in further impoverishment.

Public expenditure in the developing countries increased its share of GNP by nearly 41% between 1972 and 1986, central governmental expenditures rising from 18.7% of GNP in 1972 to 26.3% in 1986. Much of this was due to rising interest payments on the foreign debt. However, the share of central government expenditure devoted to human development (notably, health and especially education), declined. Real public expenditure on education per student and real public expenditure per capita on health often either stagnated or declined. Human development and health are of course essential ingredient in increasing economic growth, whilst excessive public spending counters long-term economic growth. It would be highly desirable if developing countries in the 1990s could take advantage of the improved international political climate and further curtail military expenditure, thereby releasing additional resources for expenditure on human development and for physical investment. Yet, global conflicts have risen acutely in recent years.

In many countries, above all in those affected by serious debt-servicing problems, the fiscal deficit of the central government is the major constraint on development. The ease with which several countries have generated trade surpluses indicates that the balance-of-payments constraint is not always as severe as is thought, and widespread evidence of massive capital flight indicates that in those countries at least a savings constraint is not binding. Fiscal reforms (designed to raise more revenue) and debt relief (which would release public-sector funds for development purposes) often are main priorities.

Other policy reforms are also likely to be necessary in many countries. These include measures to improve the efficiency of domestic capital markets and alleviate financial repression and controls to prevent capital flight. The deficits of public sector enterprise are quite large in some countries and these, too, represent negative savings and hence a constraint on growth. Where deficits are quantitatively important, governments should reconsider the pricing policies of public sector enterprises as well as the desirability of transferring such enterprises to the private sector. The objective should be to accelerate savings and capital formation in support of faster growth, and policies towards public sector enterprises should be made consistent with this overall priority.