WASHINGTON (MNI) – The following is the text of Federal Reserve
Chairman Ben Bernanke’s comments to the Cleveland Clinic Wednesday, on
the subject of “The Sources of Sustained Growth:”

Good afternoon. I am pleased to participate in the Cleveland
Clinic’s “Ideas for Tomorrow” series. My public remarks often concern
short-run economic developments, but it is important once in a while to
place those shorter-term developments in the context of the powerful
long-term trends shaping the global economy. Of these trends, surely one
of the most important is the rapid and sustained economic growth
achieved by the emerging market economies. Today, by some measures at
least, developing and emerging market economies now account for more
than one-half of global economic activity, up substantially from less
than one-third in 1980.1 Today I will discuss what the experience of the
emerging markets teaches us about the sources of economic growth and
conclude with some thoughts about the prospects for future growth in
this critical part of the global economy.

Among the emerging market economies, the Asian “growth miracle” is,
of course, the most conspicuous success story, with the case of China
being particularly dramatic. Over the past three decades, growth in
Chinese output per person has averaged roughly 9 percent a year, putting
per capita output about 13 times higher now than in 1980. The economy of
Korea, another East Asian success story, has expanded, on average, at
better than a 6 percent annual rate over the past 30 years. Growth in
Latin America has been more moderate, but that continent has made
substantial economic progress as well, most notably in terms of lower
inflation and greater economic stability. More recently, the pace of
recovery in most emerging market economies from the global financial
crisis has been impressive. In short, in the past few decades the
emerging market economies have made significant strides in raising
living standards. Hundreds of millions of people have benefited from
this progress, with many millions lifted out of poverty.2 To be sure,
the gap with the advanced economies remains substantial, but it has been
narrowed significantly.

These developments raise the question: How have the emerging market
economies achieved such strong results in recent decades? The answer is
complex, of course, and I can only scratch the surface of these issues
today; but I hope to lay out some key themes and provide some food for
thought.

Fostering Growth in Developing Economies: The Washington Consensus

Ironically, the rapid growth of the emerging market economies
reflects in part the low levels of development at which they began. In
the economic-growth derby, in contrast to most types of competitions,
starting from far behind has its advantages. For example, all else being
equal, domestic and foreign investors are attracted to the higher
returns they receive from investments where capital is relatively
scarce, as is generally the case in poorer countries. In the 19th
century, the United States drew capital from all over the world to
finance railroad construction; although not all of these investments
paid off, overall they helped generate enormous increases in wealth by
reducing transport costs and fostering economic integration within the
North American continent. Similarly, emerging market economies in recent
decades have attracted substantial foreign investment in new
manufacturing capacity, in part to take advantage of low labor costs.
Developing countries also have the advantage of being able to import and
adapt production technologies already in use in advanced economies. And,
indeed, empirical studies have found some tendency for countries that
start from further behind to grow faster than those that begin with
higher incomes.3

However, much of the national and regional variation in growth
rates is not explained by initial economic conditions. Notably, emerging
Asian economies have tended to outperform, relative to what would be
predicted based solely on their levels of income per person, say, 30
years ago. And some of the poorest countries, including a number in
Africa, have continued to grow relatively slowly. So what factors — and
what economic policies — differentiate the more successful performers
from the less successful?

A classic attempt to generalize about the policies that best
promote economic growth and development, and a useful starting point for
discussion, is the so-called Washington Consensus, articulated by the
economist John Williamson in 1990.4 Writing about Latin America,
Williamson outlined a list of 10 broad policies to promote economic
development that he judged as commanding, at the time he wrote,
substantial support between both economists and policymakers. Because
these views were influential at major institutions like the World Bank
located in Washington, this set of policies was dubbed the Washington
Consensus.

Williamson’s original list of recommendations can usefully be
divided into three categories: first, steps to increase macroeconomic
stability, such as reducing fiscal deficits (which had caused high
inflation in many countries), broadening the tax base, and reallocating
government resources to build human and physical capital; second,
actions to increase the role of markets in the economy, such as
privatization of public assets, appropriate deregulation, and the
liberalization of trade, interest rates, and capital flows; and third,
efforts to strengthen institutions that promote investment, business
formation, and growth, particularly by enhancing property rights and the
rule of law.

Aspects of the Washington Consensus have stirred considerable
controversy over the past two decades.5 Williamson himself viewed the
Consensus as an attempt to synthesize the conventional wisdom of
economists and policymakers of the time, not as a roadmap or
comprehensive strategy for development. I have introduced this framework
here because it is a nice summary of the prevailing views of 20 years
ago, a time when the most dramatic growth in emerging markets still lay
several years in the future. By comparing current views with those
described by Williamson in 1990, and accepted by many, we may learn
something about which ideas have held up and which have been modified or
refuted by recent events. I will take in turn the three groups of
policies that make up the Washington Consensus.

The first group of recommendations, as I noted, comprised policies
aimed at increasing macroeconomic stability. In this case there is
little controversy. Abundant evidence has linked fiscal discipline, low
inflation, and a stable macroeconomic policy environment to stronger,
longer-term growth in both emerging and advanced economies.6 In
particular, many emerging market economies in the 1990s emulated the
success of the advanced economies in the 1980s in controlling inflation.
Over the years, the emerging market economies have also improved their
fiscal management to the point that their fiscal positions are now often
more favorable than those of some advanced economies. Improvements in
macroeconomic management have been particularly striking in Latin
America, where large budget deficits and high inflation rates had
produced costly swings in economic activity in previous decades. Brazil,
for example, suffered hyperinflation from 1986 to 1994, with several
years of inflation well in excess of 500 percent, but has maintained an
average annual inflation rate of about 5 percent since 2006, while (not
coincidentally) reducing the ratio of its budget deficit to its gross
domestic product. Disciplined macroeconomic policies have also supported
growth in emerging markets by fostering domestic savings, stimulating
capital investment (including foreign direct investment), and reducing
the risk of financial instability.

The second group of recommendations listed by Williamson emphasized
the need for greater reliance on markets: the freeing up of the economy
through privatization, deregulation, and liberalization. The basic idea
here has held up pretty well; most observers today would agree that
carefully managed liberalization — the substitution of markets for
bureaucratic control of the economy — is necessary for sustained
growth. For example, trade liberalization measures, such as the
reduction of tariffs and the removal of other controls on exports and
imports, have been a key element of the growth strategies of a number of
fast-growing emerging market economies, including China.7 Openness to
inflows of foreign direct investment has helped many emerging economies
import foreign management techniques and technologies as well as to
attract foreign capital. More generally, greater use of markets improves
the allocation of resources, creates incentives for more efficient forms
of production, and encourages entrepreneurship and innovation.

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** Market News International Washington Bureau: 202-371-2121 **

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