Book Launch: The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World

Economists Otaviano Canuto and Marcelo Giugale pointed to a major shift in the world’s balance of economic power in their new book “The Day after Tomorrow: A Handbook on the Future of Economic Policy in the Developing World.” While developed countries face high unemployment, heavy public debt, and stagnant economies, developing countries have maintained the positive growth premium that emerged prior to the financial crisis. Moreover, the economists said they expect major emerging economies—while facing their own challenges—may become the new locomotives of the global economy.

In the aftermath of the economic crisis, Canuto and Giugale asked 40 of their World Bank colleagues to lay out their visions on how key economic policy issues will be dealt in the developing world within the next three to five years. The book resulted from this exercise revealed a reasoned optimism, based on sensible macroeconomic policies that have made developing countries resilient to the recession that engulfed advanced economies after the 2008 collapse of financial markets. Also, developing countries are integrating with each other and catching up technologically with advanced economies. Many are rich in natural resources that will remain in high demand.

Meanwhile, the United States and European Union are still dealing with the consequences of the global meltdown. In history, whenever there is a combination of a credit crunch, a housing bust, and an equity bust, usually this constitutes a very slow to reverse shock, Canuto explained, adding to that the sluggish recovery of jobs and macroeconomic uncertainties. “Private firms are hoarding cash because they are insecure with respect to what to do with the money and not necessarily creating jobs,” he said. Yet, unlike in previous economic cycles when a financial crisis in developed countries meant an often worse crisis in developing countries, this time developing economies, with the exception of some in Eastern Europe, have managed to grow independently of the advanced economies—what economists call ‘trend decoupling.’ The fast recovery in many large emerging markets and even in low-income countries in Sub-Saharan Africa has reflected the good shape and sustainability of their national balance sheets and banking regulations, which allowed for a strong reactive countercyclical fiscal policy to the crisis, according to Canuto. Also, developing countries have realized that poverty reduction is good for growth and, thus, are seeing an emergence of a mass-consumption society. In the past, Latin America, for example, lagged behind because of the lack of domestic mass consumption.

Giugale stressed that the switchover between emerging markets and rich nations will not take place in a policy vacuum and will fundamentally change the development agenda. The first big change is that “we can vanquish extreme poverty within a generation” because of new conditions such as growth, low inflation, and the use of technology that can accurately count and map the poor. “You can now do tailor-made social policy,” Giugale said, referring to conditional cash transfers, which translate into more poverty reduction for money spent. By knowing the individual, governments can focus their resources on cognitive skills—IQ or finishing high school, for example—and non-cognitive skills—the attitudes to new things, discipline, and commitment, described by Giugale as a new field in the psychology of development. “The final outcome of a person as an agent depends as much on cognitive skills as on non-cognitive skills,” he stated.

Also, governments can now focus on equity instead of equality, Giugale said, explaining that equality is giving everybody the same rewards and equity is giving everybody the same chances. Before, while one could measure inequality with the Gini coefficient, there was no indicator for equity. But in 2008 the World Bank designed the Human Opportunity Index (HOI), which showed that the most important factor for one’s success is not gender, birthplace or skin color, but his or her mother’s education. The HOI also provides an important angle to complete the view on countries’ stages of development, combining with other indicators such as the business environment and the human development index. “Think about what you couldn’t do before: first, you didn’t have the mathematics and second, you didn’t know the individual,” Giugale said, “Now you have both.”

The second big change illustrated by the authors is the trend toward better governance in developing countries due to information technologies and financial management. This means governments can track every single expenditure back to their budget, and, consequently, to their decision in congress. The ability to combine IT with financial management made possible the creation of standards, Giugale stated. For instance, governments used to spend lots of money in education without knowing what they achieved. “Now we have standards for every single angle of education,” he said, “We know that a second grader should be able to read at least 60 words per minute, if [he does] not, we know there is something wrong.”

While reading Canuto and Giugale’s book, Kent Hughes said he was concerned with some challenges that the world needs to overcome for their visions to be achieved, especially in terms of global governance. “This is going to take place in an era in which some big current account deficit countries, like the United States and the United Kingdom, simply have to adjust,” he observed. Ajay Shankar celebrated the optimism regarding the developing world, which finally seems well-grounded. He observed that there is a broad consensus now that markets deliver growth, as opposed to an earlier left/right divide between those who are pro-market and anti-market.

Posted by:  Renata Johnson

Paulo Sotero, Director, Brazil Institute


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