The Mechanics of Failure and the Secrets of Success

This chapter analyzes the mechanics of failure and the secrets of economic success. Cesar Luis Menotti's strategy's main ingredients could serve as a metaphor for the basic argument in the chapter: any low-income country can achieve sustained and inclusive growth if it properly identifies its endowment structure and uses its most competitive factors to exploit its comparative advantage. The chapter starts with a presentation of the standard model of stabilization and structural adjustment, which has come to dominate development thinking and policy across the world and has survived several decades of critical research. It then explores reasons why the model has endured despite criticism from across the ideological spectrum, especially in the 1980s and 1990s. It also offers an analysis of why traditional policy frameworks derived from the standard model often do not yield results, and it stresses the need to focus growth strategies on coordination and externalities. The chapter ends with a discussion of one of the main side effects of the standard model and its growth prescriptions: the extreme dependence on foreign aid by many low-income economies, especially those in Africa.

Unpleasant Truths about Institutional and Financial Development

This chapter refutes the linear and almost teleological approach in vogue in development economics on political and financial institutions. It briefly discusses the theoretical issues at hand and suggests that policies take into account the requirements of both time and place, which emphasizes the importance of the development level. The chapter acknowledges that institutional development problems are indeed major impediments to economic growth. But contrary to conventional wisdom, it argues that they are often correlated with the level of economic development. Seen from that perspective, the well-known weaknesses in the governance and financial sectors of many poor countries today often reflect their low level of development and the results of failed state interventions and distortions originating from erroneous economic development strategies.

Introduction: The Art of Engineering Prosperity in Unlikely Places

This chapter provides a methodological approach that draws lessons and insights from economic history and theory and uses empirics from economic analysis and policy practice. It starts with an observation of the increasingly globalized world economy in which technological development allows the use of factors of production in locations that maximize returns and utility, and countries gain mutually by trading with each other if their strategies focus on revealed and latent comparative advantage. By following carefully selected lead countries, latecomers can emulate the leader–follower, flying-geese pattern that has well served economies since the eighteenth century. The prospects for sustained and inclusive growth are even greater for low-income economies that enjoy the benefits of backwardness. The chapter advocates implementing viable strategies to capture new opportunities for industrialization, which can enable low-income economies to set forth on a dynamic path of structural change and lead to poverty reduction and prosperity.

Reaping the Dividends of Globalization: A Winning Road Map

This chapter analyzes the conditions needed to design and implement successful special economic zones and industrial parks. It discusses long-term trends and fundamental issues in global trade since trade is the main source of growth for low-income countries that have limited domestic demand. In recent years the story of global trade has often been presented by some economists and development experts as a cause for concern on the export-led growth model that made possible the so-called Asian Miracle that is no longer available for poor countries in Africa or South Asia. But statistics appear to show a turning tide: the value of world merchandise exports rose from $2.03 trillion in 1980 to $18.26 trillion in 2011, equivalent to 7.3 percent growth per year on average in current dollar terms according to WTO trade statistics. But from 2012 to 2014, world trade growth averaged only 2.2 percent, well below the average for the proceeding 20-year period. This has raised the question whether the same shaping factors that have given rise to today's global trade system are likely to continue in the medium and long term.

The Tyranny of Litanies

This chapter examines some of the policy issues often presented as the causes of poor economic performance and underdevelopment. It identifies the most commonly posited causes such as insufficient physical capital, bad business environment and poor governance, weak human capital and absorptive capacity, low productivity, and bad cultural habits such as laziness. Many of the reasons often put forward in the development literature to justify the poor economic performance of low-income countries are generally symptoms of the problem rather than its root causes. No country begins its process of sustained economic growth with the “appropriate” amount of physical or human capital. Economic take-off and poverty reduction processes have now occurred in countries with widely different cultural backgrounds and political and administrative itineraries. This has led to another line of “prerequisites to economic development” articulated around the notions of institutional and financial development.

Making the Most of Existing Circumstances

This chapter evaluates lessons from development thinking and experience and identifies the main reasons why past intellectual and policy frameworks failed to yield the expected results. It offers a pragmatic blueprint for allowing low-income countries to ignite and sustain economic growth without preconditions. With the liberalization of trade in the 1980s and 1990s, many domestic manufacturers could not face competition and were wiped out. Early deindustrialization became a trend in most developing countries. However, when developing-country governments leverage export-processing zones to attract the relocation of export-processing light manufacturing from more advanced economies with rising wages, as the East Asian tiger did in the 1960s and China did in the 1980s, they were able to leap into the global market immediately. By attracting foreign direct investment and foreign firms in export-processing zones, poor countries can improve their trade logistics, benefit from knowledge transfer, and make their local firms gradually competitive in domestic and global markets.

Ambitious Pragmatism: First-Order Economic Principles

This chapter draws on lessons from history to argue that policy disappointments such as Ghana's mainly reflect failure not of politics but of economic thinking and policy making. There are now enough both failed and successful experiments in economic development for researchers and policy makers to draw on. It highlights the possibilities for poor countries to transform into middle-and even high-income economies and stresses the benefits of such transformations for the world economy as a whole. The chapter starts with a discussion of the role of agricultural development in developing countries today, stressing both its potential contribution in the short term and its limitations in the medium and long term. It then details some first-order economic principles for success, pointing to the need for structural change, which occurs only through industrialization. For the process to be successful, economic policy should aim at “ambitious pragmatism,” which requires calibrating the pace of economic take-off with the existing economic structure and country development level.

The Art of Performing Economic Miracles: Implementation Guidelines

This chapter talks about the elements for success that may sound abstract, but actually provide a framework for achieving sustained growth, employment creation, and poverty reduction in poor business environments. It explains how the elements are applied to real policy situations and offers a road map for implementing an economic development strategy that leaves little to randomness. Drawing from economic history and analysis, the chapter explains why countries do not evolve from low- to medium- and high-income status as the result of chance. It starts by explaining the importance of rational selection and the choice of policy domains that will give a poor economy the highest probability of developing dynamic business ventures. It then provides step-by-step guidelines for policy makers in poor countries struggling to make sense of the often-conflicting economic advice they receive from many development institutions.

The Economics of Chance: Policy Prescriptions as Laundry Lists

This chapter discusses the foundations of the most popular policy prescriptions that are offered to developing countries as blueprints for prosperity. It starts by sketching the historical intellectual background that determined economic policies in colonial times. It then reviews the various waves of development thinking that have dominated research and policy making since World War II. It also highlights some issues with the analytics of growth and the random search for binding constraints in developing countries. The chapter concludes with a review of the disappointing results of the lengthy policy prescriptions that developing countries typically receive and adopt. It emphasizes how new approaches should be complemented by more precise policy frameworks to guide government and private sector actions and encourage the process of industrial upgrading and structural change, which is at the core of all successful development strategies.