Wednesday, 13 February 2008

Forty year plan for economic success

Here is a general plan for government to bring economic success to a low income developing country. It aims to take a country from destitution to incomes close to the world average in around 40 years.

Years 1-10: Identify the major blocks on economic growth. Where the government is directly responsible, stop causing them. Where the government is not directly responsible, do what it can to stop them. Encourage savings in the population by supporting the development of a stable domestic financial sector. Invest in education, particularly at primary level. Use foreign grants and cheap loans to boost the investment rate. Ask for debt cancellation.

Years 11-20: Implement more sophisticated controls on the financial sector, which should be seeing higher domestic savings and growing foreign investment. Liberalise the trade sector, and cautiously liberalise the capital markets. Government savings - ie, saved surpluses in budgets - can be maintained for future investment purposes, or in the form of foreign funds to keep the exchange rate artificially low. Protection of new companies or their domestic networks may be suitable in strategic industries. Encourage diversification of output through (limited) government investment, information publication, or infrastructure development. Increase education expenditure in primary and secondary schooling. Start to invest to offset the effects of global warming.

Years 21-30: Continued cautious liberalisation of the capital markets. Reform of tax system towards a form where income tax is the principal source of revenue. Maintain practices from years 11-20. Reduce industrial protection very gradually, and keeping companies informed of future plans. Increase secondary schooling expenditure and university schooling. Enter regional trade bodies.

Years 31-40: If politically possible, maintain a low exchange rate, so that the economy continues to grow in proportion to domestic investment without having to worry excessively about changes in domestic demand. Strengthen regional trade links. Increase sophistication of government and central banking economic activities. Start to lecture developed countries about the superiority of the government's economic approach. Worry about global warming.

The plan is somewhere between neoliberalism, Post-Washington Consensus, and the pragmatic ideas associated with Dani Rodrik. It doesn't reject Keynesianism or radical schools of thought, but tries to get into a position where the simple prescriptions of mainstream theory are workable without recourse to the generally more sophisticated ideas of the alternatives. If the country seems to be deserving, does not disrupt international markets, or is invaluable to them, then the plan should fly.

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