What Makes growth Sustained?

• Author: Andy Berg, Jonathan D. Ostry, and Jeromin Zettelmeyer
• Position: IMF Research Department
• Pages: 80-81

Page 80

Understanding the variables that contribute to sustained growth is critical for helping poor countries close the income gap with rich countries. This is the issue explored in our recent working paper titled "What Makes Growth Sustained?"

Closing the gap between poor and rich countries requires long periods of relatively fast growth in developing countries. Although growth surges are relatively common in the developing world-even in such regions as sub-Saharan Africa, which have fared poorly in recent decades-what really sets poor-performing regions apart is that their growth spells tend to end relatively quickly, and often with periods of negative growth rather than "soft landings." How to forestall the end of growth spells is thus critical, especially for the large number of developing countries now enjoying strong growth.

Previous research has sought to explain the differences in long-term growth between countries, for example, between the rapid growth episodes in Asia and the stagnation in sub-Saharan Africa and Latin America. But it ignored the lack of persistence of growth-why some growth episodes end more quickly and abruptly or why some downturns are relatively protracted. We look at what a country is doing right prior to a deceleration of growth, focusing on the determinants of the length of growth spells, using duration analysis techniques. This approach has advantages over just looking at the causes of "turning points" or decelerations because we actually use the information about what a country is doing right during a growth spell.

Main findings

Our main findings confirm some earlier results, mainly that external shocks and macroeconomic volatility are negatively associated with the length of growth spells and that good political institutions help prolong growth episodes. We also find that trade liberalization seems to help not only in starting growth but also in sustaining it, especially when combined with competitive exchange rates, current account surpluses, and an external capital structure that favors foreign direct investment (FDI). And we find that a high share of manufacturing in exports-an indicator of the sophistication of export products-tends to prolong growth, perhaps by building constituencies for reforms that themselves are conducive to sustaining growth. Most strikingly, we find that the duration of growth is strongly related to income distribution; specifically...