CAMBRIDGE, Mass. — Anusha Chari and Peter Blair Henry, economists and professors, authored a paper entitled, “Learning From the Doers: Developing Country Lessons for Advanced Economy Growth.” This paper, published by the National Bureau of Economic Research, concludes that if both advanced and developing countries embrace a disciplined approach to economic policy, both sides would benefit and there would be global prosperity. The paper coincides with Henry’s recent book, “Turnaround: Third World Lessons for First World Growth.” In it, Henry argues that the United States does not have to repeat history; it could learn from developing countries when considering strategies to lift itself up from its own economic crisis.
Chari and Henry define discipline as “a sustained commitment to a pragmatic growth strategy executed with a combination of temperance, vigilance, and flexibility that values the long-term prosperity of all over the short-term enrichment of any single group.” Since World War II, a number of economic theories about how a developing country should develop have come and gone like fads. Communism, protectionism and dependency are examples. What Chari and Henry point out in their research is that not one economic theory is right by itself, but rather, a disciplined approach to economic policy was the key to long term success.
To support their claim, the authors drew lessons from developing countries, particularly South Korea (now developed).
South Korea’s phenomenal growth out of third world status into first world did not come about entirely from protectionist policies limiting imports, as the Asian Tiger countries were known to do. Contrary to popular belief, the Korean government actually liberalized trade. Furthermore, the government devalued their currency, the won.
The dual authors point out that between 1965 and 1990, the South Korean economy grew by 7.1% per year while running persistent trade deficits. The imports that Koreans took in were goods that helped build up their manufacturing sector, like automobiles and electronics. Hence, fledgling Korean businesses took advantage of the international marketplace and purchased products they could not yet efficiently and affordably produce themselves. In turn, the more developed countries benefited from the export of their high end goods. The South Korean case shows that its growth did not come at the expense of advanced nations.
In an interview with Forbes Magazine, Henry spoke about his new book, “Turnaround: Third World Lessons for First World Growth.” He explains that loose monetary policy, imprudent mortgage lending and inadequate financial oversight enabled a debt-financed spending spree in advanced nations like the U.S. A rush towards a fiscal austerity plan, with harsh spending cuts and tax increases like the one being demanded upon Greece of late, is not necessary. Doing so would be akin to “binge eating followed by crash dieting,” in Henry’s words. For America, Henry prescribes a disciplined approach that includes spending cuts, but not on education and infrastructure.
Henry also recognizes that growth in the developing world is good for future jobs in America because a rising middle class in developing countries would create more demand for American goods. Thus, Henry calls for America to renew its commitment to the cause of free trade. Currently, the developing world produces half of global gross domestic product and is expected to account for almost three-quarters of global growth by 2017. Like the South Koreans did, Americans could take advantage of this new international marketplace, but with the prudence and self-control that discipline requires.
– Maria Caluag