I
would like to thank the Foundation for Democracy in Africa and the
government of Mauritius for organizing and hosting this important
event.
Listening to the panels this week, I have
heard many references to "development" and "sustainable
development," and how the African Growth and Opportunity Act (AGOA)
and other trade efforts will affect development. That term seems to
mean different things to different people--indeed, it seems to
encompass a vast array of causes and issues, ranging from labor
standards to the environment to human rights.
I
believe the central pillar of development is increased economic
growth. The focus on growth should not be interpreted as a
dismissal of the importance of investment in education, health, or
other worthy efforts. Investment in those areas, in a manner
appropriate to the individual situations, is prudent. But the
bottom line is that without economic growth, governments and the
private sector would soon lack the resources to support those
efforts.
How
dire is the need for increased economic growth? Sub-Saharan Africa
unfortunately is the best illustration of that urgency.
Consider:
- The average per capita gross domestic
product (GDP) in sub-Saharan Africa was $568 in 2000.
- In order to reach middle-income status at
$1,500, GDP per capita must grow over 5 percent per year for the
next 20 years.
- To become as wealthy as the United States
was in 2000, that $568 average per capita GDP in sub-Saharan
African must grow at 5 percent per year for over 80 years.
Let's look at the record. There are 86
developing countries that are graded in the 2003 Index of Economic
Freedom, co-published annually by The Heritage Foundation and The
Wall Street Journal, and for which GDP information is available. Of
these, 37 averaged zero or negative compound annual growth in per
capita GDP from 1980 to 2000. Another 21 averaged marginal compound
annual growth between 0 and 1 percent over that span. And only 28
averaged compound annual growth in per capita GDP over 1 percent
from 1980 to 2000 (China averaged over 5 percent).
Although only one country in the
Organisation for Economic Co-operation and Development (South
Korea) averaged over 5 percent compound growth in GDP per capita
during that time period, the OECD economies averaged stronger
growth than developing countries. The OECD
nations plus Hong Kong and Singapore averaged compound annual
growth in per capita GDP of 2.32 percent from 1980 to 2000.
Developing countries averaged a
disappointing 0.57 percent, but sub-Saharan African countries
averaged very poor compound growth in per capita GDP of 0.02
percent from 1980 to 2000. Given these facts, it is hardly
surprising that few developing countries are closing the gap with
the developed world and that Africa is even further behind.
But
achieving high per capita economic growth is possible. The way for
countries to achieve that growth is to adopt policies that promote
economic freedom and the rule of law, which are measured in the
Index of Economic Freedom.
The
Index analyzes 50 economic indicators in 10 independent factors:
trade policy, fiscal burden of government, government intervention
in the economy, monetary policy, capital flows and foreign
investment, banking and finance, wages and prices, property rights,
regulation, and black market activity. Those 10 factors are graded
from 1 to 5, with 1 being the best score and 5 being the worst
score. Those scores are then averaged to give an overall score for
economic freedom. Countries are designated "free," "mostly free,"
"mostly unfree," and "repressed" based on these overall scores.
As
shown in the Index, free countries on average have a per capita
income twice that of mostly free countries; mostly free countries
have a per capita income more than three times that of mostly
unfree and repressed countries. (See Chart 1)
This
relationship exists because countries that maintain policies that
promote economic freedom provide an environment that facilitates
trade and encourages entrepreneurial activity, which in turn
generates economic growth.
This
relationship holds for sub-Saharan Africa. As illustrated in Chart
2, "mostly free" economies in sub-Saharan Africa graded in the 2003
Index averaged a GDP per capita over three times that of "mostly
unfree" economies, which in turn averaged a GDP per capita more
than $200 greater than repressed economies.
Botswana and Mauritius achieved a compound
average growth in GDP per capita from 1980 to 2000 of 4.7 percent
and 4.4 percent, respectively. Not surprisingly, these countries
adopted economic freedom early and reaped the rewards. Both nations
have been rated "mostly free" economies for most of the time that
the Index has graded them. Botswana is currently the freest economy
in sub-Saharan Africa, and Mauritius is tied for sixth place in the
region.
TRADE OPENNESS: A KEY PIECE IN THE
PUZZLE
Increased economic freedom in trade
involves lower trade barriers in developing and developed countries
alike, leading to lower costs and greater efficiency as
entrepreneurs determine the activities in which they have a global
or regional competitive advantage. These gains translate into
increased economic growth and per capita income.
To
measure a country's willingness to interact with the global
economy, The Heritage Foundation developed a "Trade Openness Index"
from a subset of four of the 10 factors used in the Index of
Economic Freedom: trade policy, capital flows and foreign
investment, property rights, and regulation. These four factors
were deemed most influential over decisions to engage in
international transactions. (See
Chart 3.)
Analysis of the relationship between trade
openness and per capita GDP reveals that open economies have an
average GDP per capita over twice that of mostly open economies,
mostly open economies have a GDP per capita seven times that of
mostly closed economies on average, and mostly closed economies
have a per capita GDP a bit less than twice that of closed
economies.
The
relationship between trade openness as measured by the Index of
Economic Freedom and higher per capita GDP holds for sub-Saharan
Africa. Mostly open economies in sub-Saharan Africa have a GDP per
capita three times that of mostly closed economies on average, and
mostly closed economies have a per capita GDP a bit less than twice
that of closed economies. (See Chart 4.) Unsurprisingly, more open
economies on average have higher levels of trade as a percentage of
GDP. (See Chart 5.)
The
relationships I have outlined are supported by economic analysis.
For instance, one World Bank study found that increased integration
into the world economy from the late 1970s to the late 1990s by 24
developing countries with over 3 billion people led to higher
growth in income. These countries achieved average growth in income
per capita of 5 percent per year in the 1990s.
By
contrast, the non-globalizing nations have seen poor economic
growth of only 1.4 percent on average in the 1990s, and many saw
negative growth. The losers in the age of globalization are the
countries that refuse to embrace the international market.
What
is perhaps more interesting are the conclusions reached on the
impact of globalization on issues often raised by
anti-globalization activists. The study found that "In the long run
workers gain from integration [with the world economy]. Wages have
grown twice as fast in globalized developing countries than in less
globalized ones...." "Despite widespread fears,"
the study continued, "there is no evidence of a decline in
environmental standards. In fact, a recent study of air quality in
major industrial centers of the new globalizers found that it had
improved significantly in all of them."
The
most important conclusion, however, is that globalization is good
for the poor. A related World Bank study found that increased
growth resulting from expanded trade "leads to proportionate
increases in incomes of the poor... globalization leads to faster
growth and poverty reduction in poor countries." Another
fact little remarked upon is that the absolute number of people in
poverty (less than $1 a day) has declined since 1980 by some 200
million individuals.
LESSONS FOR DEVELOPMENT
The
important lessons here are plain. The economic futures of
developing countries lie predominantly in their own hands through
the policies that they choose to adopt and enforce. If countries
want to increase per capita GDP, they should adopt policies that
are most likely to achieve that result: economic freedom and the
rule of law.
It
is economic freedom and the rule of law that catalyze economic
growth. It is the increased wealth resulting from economic freedom
that allows parents the luxury of educating their children instead
of making them work to help provide for their families; that
enables individuals to value green spaces for their aesthetic value
rather than their potential as fields for crops or trees for fuel;
that permits the workforce to worry about the quality of the work
environment rather than the lack of employment; and that gives
families the means to engage in preventive health practices that
lead to longer lives.
Important achievements, such as increased
literacy and lower infant mortality, can all be for naught if the
government abandons the rule of law and sound economic policy. The
most obvious example of this fact is Zimbabwe, held up by
development agencies as a model of development for the region until
President Robert Mugabe's policies destroyed the economy.
The
tragic situation in Zimbabwe also illustrates the importance of the
rule of law to economic freedom. The rule of law serves as the
supporting structure of an economy, without which it cannot operate
profitably. It ensures entrepreneurs that (1) policies will have
lasting power and can be changed only through transparent, widely
recognized procedures, permitting an environment conducive to
long-term investment; (2) the rules will apply equally to all,
rather than exempting some or being subject to change at the behest
of the powerful; and (3) they will have legal recourse if policies
unlawfully affect their activities, thereby reducing the risk of
investments.
The
fact that development lies predominantly in the hands of developing
country governments does not mean that there is no role for
developed countries. Economic assistance can help growth in
countries with good economic policies and institutions--countries
that embrace economic freedom and the rule of law. Assistance
should focus on rewarding good performers. This is the essence of
President George W. Bush's Millennium Challenge Account
proposal.
Developed nations should also reduce trade
barriers to developing nations. While developed countries maintain
low average trade barriers, their highest trade barriers tend to
apply to the goods that developing countries export, such as
textiles and agriculture products. Similarly, many developed
countries provide large subsidies for agricultural production,
which acts as an indirect trade barrier. Agricultural subsidies
encourage production and put downward pressure on agricultural
prices, which makes it difficult for developing countries to
compete.
The
World Bank and Oxfam estimate that trade barriers by developed
countries cost developing countries $100 billion a year--twice the
amount they receive in official development assistance. Michael Moore, former
Director-General of the World Trade Organization, goes further,
estimating that removing all tariff and non-tariff barriers "could
result in gains for developing countries in the order of $182
billion in the services sector, $162 billion in manufactures and
$32 billion in agriculture."
CONCLUSION
Removing barriers to trade is one of the
most important actions that developed countries can take to aid
development in poor nations and should be pursued in all possible
ways. The United States has taken some impressive first steps
through the African Growth and Opportunity Act, which appears to
have increased trade and investment between eligible nations and
the U.S. But efforts to open developed country markets to
developing country goods and services must increase, particularly
through the WTO negotiations, if developing countries are to
maximize their potential for growth.
In
short, developed countries can help by lowering their trade
barriers and by focusing development assistance to those countries
that are making improvements in economic freedom. But, of utmost
importance, developing countries must make their own internal
reforms by implementing policies that promote economic freedom,
that promise economic growth. Only then will developing countries
be on the path to economic development.
Brett
D. Schaefer is Jay Kingham Fellow in International
Regulatory Affairs in the Center for International Trade and
Economics at The Heritage Foundation. These remarks were delivered
at a conference on "AGOA: The NGO Perspective on Implementation,
Progress and Future Objectives" in Phoenix, Mauritius, on January
13-17, 2003.
