Recovery path uncertain for developing countries, says Oxford economist

There is uncertainty about economic recovery from the Covid-19 pandemic and growth in developing countries like Bangladesh as they cannot take out huge loans like the developed countries, says development economist Professor Lant Pritchett.

"Developed countries are lending money to their people to cope with the pandemic impacts. They are doing it to keep the cycle of consumption on. They are thus expected to return to rapid growth, but not all countries can do it the same way," he said in the keynote at an online conference on Thursday.

Professor Pritchett is the RISE Research Director in the Blavatnik School of Government at the University of Oxford.

South Asian Network on Economic Modeling (Sanem) organised the three-day second Sanem International Development Conference (SIDC) 2021.

Two papers were presented on the first day. Among the participants were noted economists Professor Rehman Sobhan, chairman of the Centre for Policy Dialogue (CPD) and Dr Selim Raihan, economics professor at the University of Dhaka, also Sanem executive director.

The keynote was followed by an open discussion moderated by Dr Selim. He said the Organisation for Economic Co-operation and Development (OECD) and non-OECD countries would probably see two different recovery trajectories because of the differences in deal environment and state capabilities.

The transition from deals to rules and the development of state capabilities do not happen overnight and are determined by several underlying factors, he said.

Professor Pritchett remarked that economists around the globe have been very caught up with the idea of responding to problems with new policies.

He said it is easy to design and change policies but without strong institutions that can enforce legislations, policies do not have the predicted impact in practice.

It is also important to recognise the radical uncertainty of the current world context in which it is extremely difficult to forecast what might happen to the overall global climate for growth, which countries like Bangladesh are facing, he said. 

Hence, a country like Bangladesh, which has had a positive growth trajectory in the recent past and relied strongly on certain booming industries, needs to be open to the uncertainty that the same success with the same sets of exports might not be feasible because of the reorientation in global trade, consumer preferences, and trade links caused by the pandemic, Pritchett explained.

"If you keep making plans on the presumption that the world is going to go back to normal and then if it does not, you will fail to formulate a contingency plan of how to re-engage Bangladesh's sets of capabilities to continue export success in a new and different world," the professor said.  

Professor Rehman said dealing with a conventional shock coming from changes in the business cycle requires a different set of capabilities and responsibilities compared to a shock like Covid-19, where the country is partially influenced by the external shocks coming from the loss of markets internationally.

He said the quality of the response would depend greatly on the nature of the policymaking apparatus and the capabilities of policymakers.

Not only have countries like China and Vietnam demonstrated considerable resilience in their capacity to respond to Covid-19 and manage the pandemic, but also the geographical configuration of their markets and the structure of their economies have played a strong role, Professor Rehman said.

He explained that the density and the size of the Chinese economy has allowed it to internalise its response and take control of the situation, which would not have been the case if it had a high degree of external dependence.

"The future of Bangladesh may lie in its ability to get properly plugged into the Chinese value chain through diversifying its exports away from Europe and North America, regions that are much more prone to trade and economic instability compared to China," said Rehman.

Experts in the conference said over the last 20 years, Bangladesh experienced consistent and stable growth despite the lack of rules and a high degree of reliance on a single export of readymade products. 

They said a closed-order deals environment which is stable in nature can provide powerful expectations for the key actors and motivate them to innovate, invest, and create industries that lift the economy and produce high rates of growth.

But an unstable deals environment can often create a massive shock in the economy which leads to extended periods of stagnation. That is why good institutions are key to ensuring stability of growth within an economy, they added.

Earlier, Professor Pritchet opened his presentation by saying that conventional wisdom in general, especially in terms of Covid-19, has been based on the growth dynamics of rich countries.

Oftentimes, the paradigm within which people are talking about how to respond to issues is built on a model of developed countries, such as Denmark, Germany, or the US, he said.

He outlined the ways in which growth dynamics for developing countries are fundamentally different.

"The growth dynamics of the rich, OECD countries over a long period of time (since 1870 to the 2000s) look fundamentally the same. They all grew at 2% per capita amazingly steadily, which means even massive negative shocks did not affect the long-run level of GDP per capita due to very strong recovery," said Pritchett. 

He further said if the expectation of the dynamics of growth is always as such, the obvious policy recommendations in response to every shock are roughly the same – shorten the shock if one can and borrow to smooth consumption consequences.

These recommendations make up the conventional wisdom of the OECD countries but everything that is true about these countries is not at all true for the growth dynamics typically experienced outside these countries, the professor said.