MILAN – In 2008, the Commission on Growth and Development, which I had the privilege of chairing, produced a report updating our knowledge about sustainable growth patterns. Then, as now, one thing is clear: the policies that underpin multi-decade periods of high growth, structural transformation, rising employment and incomes, and dramatic reductions in poverty are mutually reinforcing. The impact of each is amplified by the others. They are ingredients in recipes that work – and, as with recipes, missing items can substantially undermine the outcome.
To understand the weak, deteriorating, and fragile growth patterns seen today in many countries and in the global economy as a whole, one should compare what is actually happening with what reasonably comprehensive growth strategies might look like. Of course, there are many policies that sustain high growth, and to some extent they are country-specific. But a few key ingredients are common to all known successful cases.
The first is high levels of public and private investment. In successful developing countries, investment is at or above 30% of GDP. The public-sector component (infrastructure, human capital, and the economy’s knowledge and technology base) is in the 5-7% range. And the public- and private-sector investments are complementary: The former raises the rate of return to the latter, and hence its level.
Private domestic and foreign investment is influenced by a host of other factors that affect risks and returns. These include the skills of the workforce, the security of property rights and related legal institutions, ease of doing business (for example, the process and time required for starting a business), and the absence of rigidities in its product and factor markets (those for labor, capital, and raw materials).