Ben S Bernanke: Lessons from emerging market economies on the
sources of sustained growth
Speech by Mr Ben S Bernanke, Chairman of the Board of Governors of the Federal Reserve
System, at the Cleveland Clinic "Ideas for Tomorrow" Series, Cleveland, Ohio, 28 September
2011.
* * *
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
longterm 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
3
The idea that levels of output per capita tend to converge across countries, which in turn implies that the
countries that are initially the poorest tend to grow the fastest, is known in the research literature as "absolute
convergence." A more sophisticated variant of this idea is "conditional convergence," which holds that
convergence across countries holds only after we control appropriately for factors that affect the long-run level
of output in each country, such as the domestic saving rate and the rate of population growth. Empirical
analyses generally find somewhat mixed evidence for absolute convergence but fairly robust support for
conditional convergence. See, for example, Barro and Sala-i-Martin (2004) and Durlauf, Johnson, and Temple
(2005). Rodrik (2011) and some others have argued recently that absolute convergence holds at a more
disaggregated level in the manufacturing sector.
4
Williamson initially articulated the Washington Consensus in a speech in 1989, but the first written version
appears in Williamson (1990). See also Williamson (2004) for his views on the various interpretations given to
his recommendations.
5
Examples of critiques of the Washington Consensus include Burki and Perry (1998), Rodrik (2006), and
Birdsall and others (2010).
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. However, as I will discuss in a
moment, experience has also shown that the success of reform programs may depend
crucially on how the transition to greater market orientation is managed, and in particular on
how market reforms are sequenced, issues on which the Washington Consensus is largely
silent.
The third part of the Washington Consensus focused on strengthening property rights and
the rule of law - for example, through effective enforcement of contracts. The evidence
suggests that these factors too can be important for development.8 For example, the inability
to establish clear title to land or buildings has inhibited entrepreneurship and investment in
some poor countries. On the other hand, some critics fault the Washington Consensus for
paying insufficient attention to the role in economic growth of a much broader range of
institutional factors than property rights alone - standardized accounting conventions,
political accountability, control of corruption, bankruptcy laws, and capable and transparent
regulatory agencies, for example.9 Moreover, the Washington Consensus provided little
specific advice on how to create and sustain a strong institutional framework, nor did it touch
on a variety of institutional arrangements - central bank independence being one familiar
example - that have been shown to promote economic stability and growth.10
Amending the Washington Consensus
Overall, some key elements of the Washington Consensus appear well supported both by
basic economic logic and by their successful application by a number of countries. However,
the experience of the past two decades also suggests some lessons that augment or modify
what we thought we knew about economic development in 1990. I will highlight three specific
lessons.
First, the implementation of the Washington Consensus recommendations is important and
not so straightforward in practice. In particular, as I alluded to earlier, the sequencing of
reforms matters. For example, some developing countries, following the principles of
liberalization and deregulation, removed controls on the inflows of foreign capital, and foreign
investors responded by pouring in funds. However, the banking systems and the associated
regulatory and supervisory agencies in these countries were not always well prepared to
manage these capital inflows. Consequently, some of the foreign capital was badly invested,
which in turn contributed to emerging-market financial crises, like those in Mexico and
emerging Asia in the 1990s. This experience suggests that measures to strengthen banks
and bank regulation should be put in place before the domestic market is opened to capital
flows from abroad.
Similarly, dismantling controls on the domestic financial industry has proven
counterproductive when important complementary factors - such as effective bank
supervision, the availability of bank managers trained in market-based lending, or consumer
familiarity with financial products such as credit cards - were absent. For example, Korea
experienced a mini financial crisis in early 2003, resulting from a massive run-up in
household debt. In the wake of policy changes to liberalize and increase competition in
domestic financial markets, credit card debt in Korea as a share of its gross domestic product
more than tripled between 1999 and 2002, as the average number of credit cards for every
adult in the country rose from 1 to 3. Korea's consumers, lenders, and regulators had little
experience with credit cards, and institutional arrangements for sharing data on consumer
credit, including credit reports, were inadequate. Not surprisingly, at least in retrospect,
delinquency rates soared, putting the solvency of a number of the country's major financial
institutions at risk. The broader lesson is that institutional arrangements, ranging from
accounting rules to regulatory frameworks to tax-compliance tools, must be sufficiently
developed to ensure that reforms are successful. Fortunately, even in the absence of a clear
consensus on how best to sequence and implement reforms, many countries have
successfully promoted growth through a slow and pragmatic but continuing process of
liberalization.
A second important lesson of the past two decades involves the pivotal role of technology in
economic development. For emerging market economies, which tend to lag behind in
technological sophistication, rapid gains in productivity can be achieved by adapting
state-of-the-art technologies already developed by the advanced economies rather than by
having to develop these technologies from scratch. But successful importing of technologies
does not happen automatically or without preparation. For example, strong educational
systems producing increasingly skilled workforces have proven crucial for climbing the
technological ladder. In the United States, substantial increases in educational attainment
from the beginning of the 20th century through the period following World War II were
instrumental in driving economic growth.11
In the emerging market world, India's information technology (IT) services industry has
thrived in large part because of the country's large supply of well-educated, English-speaking
workers. And it is not just higher education that matters. Encouraging basic levels of literacy
is critical as well. Promising programs in some emerging market countries, such as Brazil
and Mexico, provide modest amounts of money to poor families (generally to women) on the
condition that their children attend school regularly and receive basic health care. The
evidence suggests that these programs enhance the quality of the economy's labor
forcewhile addressing social goals such as reducing gender and income inequality.
Many emerging market economies have also harnessed international trade as an engine of
technical progress. Openness to trade has allowed these countries to import state-of-the-art
capital goods, and vigorous international competition has increased the efficiency of
domestic firms and facilitated the transfer of skills and knowledge. International trade has
also helped shift these economies away from basic agriculture toward manufacturing, with
substantial benefits for average productivity. These benefits of trade openness do not require
large trade surpluses, by the way, only a willingness to engage with and integrate with the
global economy. Notably, Korea ran current account deficits through much of its "growth
miracle" phase.
A third important lesson that has come into sharper focus, and which was not fully
appreciated by the Washington Consensus, involves the capacity to draw on economies of
scale to accelerate the pace of technical progress and economic growth. Economies of scale
refer to the efficiency gains that can be achieved in some industries when production is run
at a very large scale. These gains may arise because of the nature of the technologies
involved - as, for example, in steel manufacturing.12 But in some cases they can also arise
because of the need to develop a critical mass of skilled workers and specialized suppliers. It
is no coincidence that so many high-tech firms locate near each other in California's Silicon
Valley or North Carolina's Research Triangle; these firms benefit from the ability to draw on
sufficiently large pools of skilled labor and other resources, while sharing ideas and
information in mutually beneficial ways.13 A single, isolated firm would not likely be as
productive. Thus, scale economies can arise in the development of knowledge centers, like
research universities, or in the building of large-scale infrastructure, like a national highway
system.14 For example, India's IT industry is clustered in certain regions, such as Bangalore,
around some of the more successful and high-quality institutes of technology in the country.
Moreover, recent research suggests that the growth of information technology activity in India
has increased returns to schooling and has significantly increased primary school enrollment
in areas where call centers are located.15
Encouraging international trade can also help countries capture the benefits of scale. For
many emerging market economies, domestic markets are not large enough to support the
amount of production needed to achieve efficiency gains. Access to global markets has
enabled production to expand to levels where economies of scale could be more fully
exploited. Additional efficiencies can sometimes be gained when countries specialize in
particular stages of a good's production. They import parts and components from other
countries and use them to produce new products, which themselves may be further
processed or assembled in still other countries. At each stage, the production is for the world
market rather than for domestic producers or consumers alone. Many Asian economies are
interlinked through a network of vertical supply chains; China is often referred to as the
endpoint in the global supply chain because the assembly of so many goods is completed
there before being shipped to consumers around the world.
The existence of economies of scale may, in some circumstances, also create a rationale for
targeted government interventions in the economy - in other words, industrial policy. The
premise of industrial policy is that large-scale industries may not be able to get off the ground
without government support or protection, given the substantial start-up costs and the
existence of more-efficient competitors in other countries. Indeed, government support for
certain industries does seem to have played a role in several of the best-performing
emerging market economies, including China and Korea.16 But such interventions can be
double-edged swords. The experience of many decades tells us that industrial policies are
far from a sure-fire development strategy, as they require that the government be adept at
picking winners. One example, the role of government intervention in promoting ethanol
production in Brazil, illustrates the vagaries of industrial policies. After being introduced over
the mid- to late 1970s, for several years the program was generally viewed as a failure. More
recently, however, the sustained upward trend in world oil prices has turned ethanol
production in Brazil into a profitable venture.17 But in many cases, similar interventions have
failed or crowded out the development of other, potentially more profitable industries.
Lessons and implications for the future
What implications can we draw for longer-term prospects for growth in the emerging market
economies? Notwithstanding the recent impressive growth, output per person in the
emerging market economies generally remains much lower than in the advanced economies.
This fact suggests that the emerging market economies should be able to maintain relatively
high growth rates for some years to come, as they continue to catch up to the advanced
economies. But over time, as the emerging market countries become wealthier and
technologically more sophisticated, they will gradually lose the advantages of starting from
behind. Even with continued strong policies, their growth will slow as returns to capital
investments diminish and the most profitable opportunities are exploited.18 For example, over
time, rising wages in manufacturing should make production and investment in China and
other East Asian nations less attractive. Also, technological progress will slow as the process
of importing foreign technologies reaches its limits, forcing greater reliance on innovation in
emerging countries themselves. Resource and environmental constraints, as well as aging
populations, should also slow economic growth. But in many ways, such a slowdown in
growth will be the inevitable result of progress - the culmination of a successful catching up
process - and in that respect should be viewed as a consequence of success, not of failure.
Many emerging markets also will be challenged by their reliance on trade to drive growth. As
I have discussed, international trade has many benefits. However, generating trade
surpluses by suppressing domestic demand defeats the ultimate purpose of economic
growth - improving the lot of the country's own citizens. Large and persistent imbalances in
trade are also inconsistent, in the long run, with global economic and financial stability. Of
course, the advanced economies, like the United States, need to do their part as well in
reducing global imbalances, as I have noted on numerous occasions before.
In fact, with the emerging market economies accounting for a large and growing share of
global activity, many of them can no longer view themselves as small, open economies
whose actions have little effect on their neighbors. With increasing size and influence comes
greater responsibility. In response to this new reality, many of our international institutions
have been restructured in recent years to give an increased voice to the emerging market
economies. For example, the Group of Twenty (which has significant emerging market
representation) has largely supplanted the Group of Seven as the premier global forum for
economic and financial policy matters, and emerging market economies have been given
increased power in setting the policies of the International Monetary Fund. These forums
should be used by advanced economies and emerging economies alike to meet their
respective responsibilities to the global economy in a spirit of cooperation.
So, what lessons can we draw about the Washington Consensus and, more generally, about
the experience of the dynamic emerging market economies over the past decades?
Ultimately, the principles that John Williamson enumerated two decades ago have much to
recommend them. Macroeconomic stability, increased reliance on market forces, and strong
political and economic institutions are important for sustainable growth. However, with the
experience and perspective of the past 20 years, we can see that Williamson's
recommendations were not complete. Reforms must be sequenced and implemented
appropriately to have their desired effects. And a successful development framework must
take into account that activities such as the adaptation of advanced technologies and the
harnessing economies of scale are often critical to economic growth and depend on a host of
institutional conditions, such as an educated workforce, to be fully effective.
Indeed, advanced economies like the United States would do well to re-learn some of the
lessons from the experiences of the emerging market economies, such as the importance of
disciplined fiscal policies, the benefits of open trade, the need to encourage private capital
formation while undertaking necessary public investments, the high returns to education and
to promoting technological advances, and the importance of a regulatory framework that
encourages entrepreneurship and innovation while maintaining financial stability. As the
advanced economies look for ways of enhancing longer-term growth, a re-reading of
Williamson's original Washington Consensus, combined with close attention to the
experiences of successful emerging market economies, could pay significant dividends.
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