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Volume 15, Number 1
March, 1992

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Economic Growth Policies For Developing Countries

OVER THE PAST FEW YEARS MANY excellent studies have been done by economic experts and investment analysts worldwide on how developing countries can best promote sustained and non-inflationary growth. What follows is an encapsulation of the most sound economic advice available to developing nations.

First, the basic rules: Pursue sustainable, non-inflationary, export-led growth. Foster a strong vibrant private enterprise. Privatize all government-owned industries, excluding major infrastructures. Attract and encourage foreign investments. Make foreign trade more efficient. Lower tariffs. Provide incentives for exports by domestic industries. Create stable, sustainable monetary growth. Tax all fairly. Avoid fiscal deficits. Deregulate the economy. Increase the political participation of the people. Learn from the lessons of the past.

What policies should developing nations follow now to encourage long term development and modernization? All goods-producing industries and service should be in private hands. All such industries presently owned or controlled by government should be privatized. If they were forcefully confiscated from their rightful owners, they should be returned, to create an atmosphere of security and confidence for attracting investments.

Strong efforts should be made to make foreign trade efficient. Reduce tariffs to create healthy competition for industry. Let the exchange rates be determined by market forces while you try to smooth out short-term fluctuations. This should help exports. Negotiate trade agreements with your neighbors and complimentary economics, so that the competitive advantage of each is most efficiently utilized.

Moreover, promote the formation of a business council or use existing Chamber of Commerce as a vehicle to communicate with the private -sector, the growth engine of your economy. Have them assess the industries where your nation could potentially be competitive in the world market. Encourage them to invest in these industries, and if they cannot do it alone encourage them to seek reliable foreign partners. Learn their requirements: infrastructure and utilities, labor and human resources, finance or capital and raw materials. What are the implications for government regulations, commercial law, education and macroeconomic policy? Then, be a coordinator between the private sector and the relevant cabinet ministries to meet the long-term requirements of your industries.

Also, create incentives for the private sector to export its products and services. Tax incentives are most powerful. Export-oriented policy and trade agreements, market or competitive levels of currency and simplified rules and regulations for exports are critical.

Eliminate all export taxes. Try to expand present trade agreements to free-trade areas, creating larger markets for trade and spurring further economic growth.

Also, all agree that for tax collection to be effective, taxes must be perceived as fair. This means all must pay their share of taxes, and taxes should not take too much of a bite from their total income. There should be a two-tiered tax - government and local.

Meanwhile, unstable monetary growth has led to inflation and exaggerates the business cycles. Private-sector planning becomes difficult. If real positive rates of return do not exist, money is channeled to commodities and inflation hedges away from productive investment and/or financial assets. A stable, steady monetary growth will contribute to sustainable non-inflationary growth.

And if you cannot avoid fiscal deficits, minimize them. Deficits mean borrowing from the future. And cut all subsidies forcefully, but gradually.

But the economic agenda for sustainable, non-inflationary, export-led growth cannot be done in isolation. It is most effective within a milieu of participatory democracy. Developed nations have both a participatory democracy and a rational government necessary for the functioning of a modern economy. Underdeveloped nations have neither. But this does not mean that during the development process the two institutes grow in tandem. In fact, development of rational economic growth thwarts the rapid expansion of participation, and vice versa.

Herein lies the dilemma of modernization: how can governments expand participation while promoting economic development? One thing for sure - there are no short cuts. Sacrificing one at the expense of the other will only destabilize the process and push development further out in time. But the implementation of a pluralistic democracy is not readily achieved. Is it enough to prescribe popular sovereignty? No! In the absence of the education, the experience and the institutions of a civil society legitimizing stable government, any form of government is impracticable.

In the ’90s the individual is gaining preeminence over the state in economic and political development. Free and fair trade and outside capital and investment are being sought. Market discipline and efficiency have been accepted. Above all, sustainable, non-inflationary, export-led growth has been recognized as the best path to long-term development.

Hamid Ladjevardi, in his role at Morgan Stanley, manages accounts for high net individuals and specializes in equity, fixed income, currency and crude oil markets. He has also developed technical systems for investing and trading. He holds an M.B.A. from Harvard.

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