Growth

What is good governance, and how should we measure it?  What impact does governance have on growth?  Even if good governance predicts positive outcomes over the long term, what effect does it have in the short term?  Dani Rodrik, well-known development economist and head of Harvard’s graduate program in public administration and international development, raises as many questions as he answers in this blog post; a recent article in The Economist addresses similar issues.  There’s a lot of interest these days in the question of how to best define and measure governance -- we’ll write more about this in the coming weeks.

As you may have heard, our new World Bank Chief Economist is Chinese, so it was with interest that I watched a short interview of him on Bloomberg about China's economy: 

One key point that I picked up is that he also remains optimistic about China's growth prospects in 2008. He answered a question about China after the Olympics, but in his answer he expressed the confidence in China's domestic economy more generally. World growth prospects have come down as the economies of the US and Europe are starting to feel the impact of the financial turmoil triggered by the sub prime problems in the US.

This will have an impact on China's exports and investment in the tradable sector. However, as Justin mentioned, China's domestic economy has pretty robust growth momentum at the moment and this will help support China's overall growth. And, given China's increasing weight in the world economy, this in turn should also help the world economy.

The year 2007 was an important milestone in modern economic history.  While the U.S. grew well, China contributed more to global GDP growth than the U.S. did.  That pattern is likely to continue for the foreseeable future.  Roughly speaking, the U.S. economy is about four times the size of China’s.  If the U.S. grows at 2% -- which is solid for an advanced economy – and China continues to grow at 10+%, then China will be adding more to global GDP each year than any other country.  The same can be said for global trade: China’s imports have risen 28% in the past year, so that it is an increasingly important source of demand for other countries. 

The growing importance of China in the global economy is the main reason that we have launched this China Development Blog.  There is huge interest in the prospects for China and in what is actually happening on the ground here. 

If you are interested in development economics, here is an interesting puzzle.

According to conventional wisdom, investment is a key ingredient for economic growth. If you invest, you grow - not immediately of course, as everything takes time. If you don’t invest, your economy stagnates.

Basically - so the wisdom goes - the accumulation of physical (e.g.: infrastructure – roads, dams) and human (i.e.: education and health) capital brings about growth and prosperity.

So, what is happening in the Philippines? The Filipino economy is growing fast, but - over the last few years - domestic investment shrunk as a share of GDP. Being an open and growing economy, one must wonder: why the decline? (click on the graph in the top left corner).

A few years ago, the research department at the World Bank did an analysis of what kind of information people were searching for on its website.  It found that the single most searched-for word was "China," more than "poverty" or any other country or concept. 

It is not surprising that there is so much interest in China given its tremendous success with growth and poverty reduction.  China is now the leading source of growth in the world economy, so everyone takes interest in its progress.  But another reason why people are looking for information on China is that, until recently, the country had been quite isolated.  One of the main reasons that China is growing so well is that it is emerging from a long period of self-imposed isolation.  Even with the progress with integration made so far, there is still a lack of knowledge about China in the outside world, and a lack of knowledge about the outside world in China.