By Anne O Krueger
THE following were opening remarks by Anne Krueger at the lunch for African governors of the International Monetary Fund last week: A strong global recovery has provided the backdrop for th
is year’s meetings. And growth in quite a number of African countries has been encouraging, offering the hope that there can be an important transformation in the continent’s economic prospects.
So the signs are promising, although much more needs to be done.
Of course, outside help is vital. But such assistance is far more productive when it accompanies homegrown reforms and sound macroeconomic policies. As growth rates have begun to accelerate in many African countries, and inflation has continued to fall, we can see the fruits of this multi-faceted approach.
It is an encouraging picture and one we need to build on.
How do we build on that, to realise Africa’s economic potential? Let me share with you some thoughts about a case where the economic potential was realised to a degree that no one predicted at the outset. Indeed, many people believed that growth could not occur at all.
Picture a poor, largely rural peasant economy, almost wholly lacking in natural resources. So poor, in fact, that this economy is crucially dependent on foreign aid transfers – amounting to more than 10% of gross domestic product (GDP). It is so poor and so dependent on outside help that some economists doubt it is a viable economy without those large aid inflows. It has the highest density of people on arable land anywhere in the world; the highest rate of inflation in the world; and its exports are 3% of GDP, 88% of which are primary commodities.
I am not talking about any African country. I’m talking about Korea in the late 1950s, then the third poorest country in Asia.
And I am not exaggerating the situation. There was genuine alarm when it became clear that the United States had decided to scale down the financial assistance it was providing Korea, on the grounds that Korea would not grow, so only providing support to maintain very low consumption levels was appropriate.
The American decision, though, was a catalyst. Koreans recognised that radical action was needed if the economy was to avoid stagnation and poverty, let alone prosper.
I said no one could have predicted how successful the experiment would be.
Let me remind you quite how successful Korea has been. Between 1960 and 2000, real GDP per capita, expressed in 1995 dollars, grew tenfold. That is spectacular growth performance, surpassing China, Brazil, India, Malaysia and Mexico, to name just a few examples.
In 1960 both Brazil and Mexico had per capita GDP higher than Korea; by 2000, Korea’s per capita GDP was almost three times that of Brazil and almost three-and-a-half times that of Mexico. This was export-led growth, with exports growing on average by more than 30% a year over three decades or more.
So how did Korea achieve such dramatic results? They were truly impressive, but there was no secret recipe.
The reforms embarked on from the late 1950s had the clear objective of turning Korea into a modern industrial economy. They systematically addressed fundamental problems. There was a determination to tackle structural problems in the economy, and to stick with a reform programme.
Sound macroeconomic policies were put in place. The economy was liberalised and the importance of foreign trade was recognised.
There was a conscious decision to rely on incentives to remove any bias towards import – competing activities – and doing so at a realistic exchange rate – thereby increasing incentives for exporters.
At an early stage, the importance of infrastructure investment as an aid to exporters and import-competing firms was recognized-and appropriate measures taken. Later in the reform process, greater emphasis was put on further liberalisation of trade and the financial sector.
And the reform process has continued as Korean policymakers have continued to adapt to deal with the problems that come with further growth. But the main thrust of economic policy has remained largely constant – an outward orientation with strong incentives for exporters, and a commitment to growth through trade. This has meant that the country has been well-placed to cope with the fresh challenges that economic success brings.
Korea’s successful per-formance was reinforced by policymakers’ ability – and willingness – to try to anticipate bottlenecks and potential crisis points. They were successful in this until the 1990s when they failed to anticipate the problems that weaknesses in the financial sector could bring for the wider economy.
Korea may have been more successful than most, but I must emphasise it is not unique. Other countries have enjoyed rapid improvements in living standards and all have done so by following similar economic policies. Korea stands out not for what it did but for the degree of commitment and singlemindedness that it brought to its task.
Economists were ready to write it off. Yet adopting sound economic policies – in particular, I would argue, shifting the focus of the economy towards trade and export growth with reliance on incentives – brought huge rewards.
Too often we pay lip-service to the benefits that trade liberalisation can bring. Too often, governments are nervous about being bold. But the evidence is overwhelming – trade liberalisation when accompanied by sound macroeconomic policies, including an appropriate exchnage rate and tariff reduction, is a vital spur to economic growth.
Multilateral trade liberalisation brings the greatest benefits, of course, which is why the Doha round is so important. But unilateral liberalisation brings great rewards as well. And there is no doubt that Korea benefited enormously from its own unilateral moves towards trade liberalisation.
Many of the benefits that developing countries can expect to gain from trade liberalisation come from liberalising trade among developing countries.
Yes, rich countries should open their markets and reduce and eliminate trade-distorting subsidies. But so should poor countries – for their own sake.
Africa is, or ought to be, a continent of economic opportunity. It is rich in natural resources. It is rich in human resources. It is making progress, both in terms of adopting sound policies and seeing the results start to materialise.
Korea’s example shows how much more can be achieved with vision, commitment and, above all perhaps, a clear understanding of self-interest.
*Anne O Krueger is first deputy managing director of the International Monetary Fund.