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From Global Imbalances to Effective Global Governance

STANFORD, CALIFORNIA – The current credit crisis has led to scaled-back projections for growth around the world. Governments and central banks are responding to damaged balance sheets and credit lockups in an attempt to limit extreme harm to their economies outside the financial sector.

In the United States, the financial sector is undergoing a high-speed but permanent structural transformation, the effects of which could be severe for developing countries’ economic growth. Indeed, these countries are already experiencing large relative price increases for food and oil, a food emergency for the poor, and higher rates of inflation induced by commodity price shifts. While rapid growth in developing countries has been an important factor in the rising commodity prices, much of this is beyond their control.

For the past two years, my colleagues and I on the Growth Commission have sought to learn how 13 developing countries managed to record growth rates averaging 7% or more for 25 years or longer. In The Growth Report , published in May, we tried to understand why most developing countries fell far short of this achievement, and explored how they might emulate the fast growers.

Sustained high growth is enabled by and requires engagement with the global economy that goes beyond simply being able to produce for a potentially massive export market. It also involves, crucially, importing an essential intangible asset: knowledge. Economies can learn faster than they can invent, so less developed countries can achieve much faster growth than was experienced by today’s industrialized countries when they were becoming wealthy.