2

# **1. INTRODUCTION**

Economists have always been conflicted between the need to understand the dynamics of business cycles, and the study of long-term growth—both of which are important for human welfare. The world economy has just experienced a severe financial and economic crisis<sup>1</sup> , which has justified the intellectual focus on stabilization policies, especially given the role that coordinated and decisive monetary and fiscal policies have played in preventing the global recession from becoming a worldwide depression. But the persistence of poverty in many parts of the world and the potential long-term impact of the crisis on global poverty reduction also highlight the importance of policies that are conducive to sustainable and inclusive growth.<sup>2</sup> Economic growth is indeed the main source of divergences in living standards across countries and regions of the world. As Barro and Sala-i-Martin (1995) observe, “if we can learn about government policy options that have even small effects on long-term growth rates, we can contribute much more to improvements in standards of living than has been provided by the entire history of macroeconomic analysis of countercyclical policy and fine tuning.” In fact, economic growth may be the single most important issue confronting economists today. The differences in output per worker and national income across countries are still puzzling. According to calculations by Maddison (2001), world population rose 22–fold over the past millennium. Per capita income increased 13–fold, world GDP nearly 300–fold. This contrasts sharply with the preceding millennium, when world population grew by only a sixth, and there was no advance in per capita income. Measured in today’s living standards, all countries in the world were poor in the beginning of the 18<sup>th</sup> century. Sustained growth in income per capita only picked up after 1820: per capita income rose more than eightfold.

A well-known fact confirmed by the recent crisis is the observation that countries that have sustained high rates of growth have also performed well despite the global meltdown. Their dynamic performance has made them more resilient. With strong external balance sheets and ample room for fiscal maneuver before the crisis, they were able to implement countercyclical policies to combat external shocks. “A crisis is a terrible thing to waste,” said Paul Romer, one of the preeminent theorists of growth. Despite its heavy human, financial and economic cost, the recent recession provides a unique opportunity to reflect on the knowledge from several decades of growth research, draw policy lessons from the experience of successful countries, and explore new approaches going forward.

> 1 The losses precipitated by the financial crisis have been enormous. Total capitalization of world stock markets halved in 2008 - about $32 trillion of wealth. The losses in household wealth during 2008 were about $11 trillion in the United States ($8.5 trillion in financial assets and $2.5 trillion in housing assets) and were estimated at $1.5 trillion in the United Kingdom ($0.6 trillion in financial assets and $0.9 trillion in housing assets). Losses of such magnitude have significant wealth effects on consumption and savings. Industrial production fell sharply in many developed and emerging countries and for the first time since 1929, world trade contracted in 2009. Data sources: Global Stability Reports; IMF Survey Magazine, June 24, 2009.

> 2 There were 1.4 billion people living under $1.25 international poverty line before the global crisis. Applying the country-specific growth projections to survey-based data and aggregating, World Bank experts calculate that the crisis will add 50 million people to the 2009 count of the number of people living below $1.25 a day and 57 million to the count of the number of people living under $2 a day. Given current growth projections for 2010, there will be a further impact on poverty in that year, with the cumulative impacts rising to an extra 64 million people living under $1.25 a day and 76 million more under $2 a day by 2010.