Openness, market-friendly institutions, and flexibility are important ingredients for growth

• Pages: 267-269

Page 267

During July 23-27, the IMF Institute offered a course on economic growth as part of its in-house training program. Xavier Sala-i-Martin, Professor of Economics at Columbia University, came to the IMF for the seventh time to discuss growth from a theoretical and empirical perspective. As on previous occasions, there was a large demand for this very popular course. Sala-i-Martin spoke with the Alicia Jiménez of the IMF Institute about the main factors that need to be present in order to stimulate growth.

JIMÉNEZ: If one had to choose the three most important determinants of growth, what would they be?

SALA-I-MARTIN: First, factor accumulation-physical and human capital-education, and so on. Second, various institutions that are friendly to markets. Third, openness not only to trade, but also to capital, to technology, to ideas, to foreign direct investment, and to information.

JIMÉNEZ: From a historical perspective, does the empirical evidence show that those three factors were present in most countries that have experienced sustainable growth?

SALA-I-MARTIN: My previous statement comes from empirical observation. But growth experiences are diverse; no single recipe works for every country.

Some countries have done well. Other countries in the same circumstances have not done well. But by and large, the three characteristics that I have mentioned-and there are actually more-seem to be present when a country's growth effort is successful, and to not be present when it fails.

JIMÉNEZ:What does the empirical evidence say about the links between health, education, and investment in human capital and growth?

SALA-I-MARTIN: The links between health and growth are pretty clear. Good health is good for growth.

Countries with a high life expectancy tend to do a lot better with growth. It's clear that at some level education matters, but the link is not as clear as one would like. In fact, a puzzling finding in the literature is that a lot of education measures--college enrollment, for example--do not seem to correlate well with growth.

One possibility is that, in many countries, a college education may not really benefit or enhance human capital. You might go to college and learn a lot of theoretical things that are not useful for production.My favorite explanation is that what you need to learn is not things, but how to learn things. In a world in which technologies change very rapidly, the labor force needs to be educated flexibly. You learn how to produce watches today, but in the next year or two, you're going to be producing CDs; and in another five years, you'll be producing something else. So, if you are trained to produce watches, and the economy produces watches, you are fine. But the minute the economy goes on to produce CDs, then you have an inflexible labor force that has not learned to learn, and this can put the brakes on growth. And this is not measured by years of education.

JIMÉNEZ: Can we say that all growth is the same, or are there high-quality growth paths?

SALA-I-MARTIN: There are different kinds of growth, some good, some bad. I think the best growth is the one that is sustainable in that it can keep going for a long time. For example, certain kinds of growth that are driven by heavy demand factors tend to...