Last week, we discussed how Pakistan has important lessons to learn from the examples of Brazil, India, Vietnam, China, and other economic successes within the last two decades; and why our best course would be to learn from and follow their policy measures, rather than trying to reinvent the wheel. Two main aspects were covered:a) How developing countries can achieve strong and sustained growth through focusing on becoming an integral part of the global trading system; and, b) Properly managing ‘a’ provides boosts in income (domestic and foreign inflows), increases household and corporate savings, and raises investment (both foreign direct and domestic). The increase in savings further helps facilitate capital formation, which, in turn, unleashes a growth cycle that generates its own momentum. China amply demonstrates the above mentioned policy ingredients of ‘engaging with the world economy’ and maintaining a sustained level of high ‘savings and investment’. According to the US Congressional Research Service, China’s domestic savings as a share of GDP was 32 percent when reforms started in 1979. The reforms led to significant growth in household and corporate savings; gross savings reached 53.9 percent of GDP in 2010. These savings have allowed China to finance high levels of domestic investment, a major engine of growth. China’s gross capital formation has boomed, particularly in the 2000s, reaching 48 percent of GDP in 2010. An OECD Survey estimates that the expansion of the capital stock contributed six percentage points annually to China’s 10.80 percent annual growth rate between 2003 and 2008 - accounting for more than 50 percent of growth. Savings and investment have clearly been a major part of China’s development story.Today, we will discuss that while it is necessary to engage with the global markets and increase household and corporate savings, yet in order to achieve sustainable success, the economic managers need to simultaneously manage the following three key elements in an economy: Stable macroeconomic policies; Prudent management of the market-based system; and Laying strong policy foundations. While economic structural reforms played a key role in transforming the Brazilian economy, Brazil’s success also stemmed from its shift toward ‘macroeconomic stability’; another important ingredient for extended high growth. As Minister of Finance, Fernando Henrique Cardoso tamed hyperinflation with his ‘Real Plan’ in 1994. Later as President, his macroeconomic policies focused on an inflation target, primary fiscal surplus, and a floating exchange rate. Perhaps surprisingly, Cardoso’s successor, Lula da Silva, continued these policies, expanding the surplus and allowing greater autonomy for the central bank. This endeavour towards maintaining a sustained macroeconomic stability within the country’s economic environment went on to play an important role in Brazil’s impressive growth performance in the 2000s. Coming to the second point, which is ‘prudent management of the market-based system’, it is important to understand that China’s growth miracle also demonstrates the importance of market-oriented reforms. Before reforms, the state controlled much of its economy and all farms were collectivised. Deng Xiaoping implemented market-oriented reforms starting in 1979. Agriculture was de-collectivised and people were allowed to start their own businesses. His market reforms also included the removal of trade barriers and the opening of the country to foreign investment through “special economic zones”. China’s efforts to find the right mix of private and public economy really began in earnest in the mid-1990s. An OECD report estimates that the state-owned enterprises (SOEs) made up nearly 78 percent of the industrial production in 1978. By 2004, that figure was 30 percent; the SOE’s share of GDP declined from 38 percent in 1998 to 30 percent in 2006. So while the state still plays a significant role in controlling the economy, there has been a huge shift towards shoring up the private sector and maintaining the ideal equilibrium that combines state capitalism with private entrepreneurial juices. The market reforms (in addition to high savings and investment, and engagement with the world) have led to one of the most impressive development success stories in history: the real GDP increased by an average of almost 10 percent a year between 1979 and 2010, lifting hundreds of millions of people out of poverty.Coming to the third and final point, which is ‘laying a strong policy foundation’, Chile’s example immediately comes to mind. Its experience following its transition to democracy shows the importance of strong political foundations. Following years of military rule led by General Augusto Pinochet, Chile returned to democracy in 1990 and has achieved an impressive record of political stability. Between 1990 and 2010, Chile was governed by the Concertacion, a centre-left coalition. The Concertacion governments mostly maintained General Pinochet’s market reforms and added some social welfare policies; they also pursued free trade agreements to promote export-led growth. In March 2010, the centre-right Sebastián Piñera became President, the first election victory for the right since 1958. His victory is a healthy sign for Chile’s democracy, following 20 years of Concertacion governments. But more importantly, it is remarkable to note that Piñera has also maintained the Concertacion economic policies. Chile’s economy has performed well, both since the transition to democracy and since the recent global financial crisis. The economy grew by an average of 5.1 percent per year when the Concertacion was in power; and after the financial crisis, it grew by 5.2 percent in 2010. Furthermore, the poverty rate fell from 38.8 percent to 13.7 percent between 1989 and 2006 (although it has risen somewhat since then due to the financial crisis and the 2010 earthquake). Chile shows that when market-oriented reforms are backed up by stable political institutions, sustainable long-term growth is possible.The above examples and the ones presented in my last week’s column demonstrate how developing countries can achieve strong and sustained growth. The most important factors are that a country engages with the world and pursues the market-oriented reforms; establishes the public-private equilibrium; attracts savings and investment; runs stable macroeconomic policies; and has strong political institutions that are committed to growth and erasing inequality in the society. China, Brazil,Vietnam and Chile all show what a country can do, and Pakistan needs to learn from their experience and economic models. This certainly does not imply that we blindly follow them, but at the same time we need to refrain from indulging in frequent pioneering experiments to instead focus on evolving solutions from a tried and tested bottle, albeit suitable to our own needs, environment and ground realities. It is no surprise that since China immersed itself in the global economic flow, it has become one of the fastest growing markets in the world over the last 20 years. And the process of reform and ‘balanced’ market management that began in 1979 still continues to strengthen the country and its prospects of sustainable growth and development in the years to come.
The writer is an entrepreneur and economic analyst.Email: email@example.com