The Curse of Double-Digit Growth
Liberia wants fast growth in order to solidify its social and political advances. Problem is, says Eric D. Werker, countries growing that quickly "are not unequivocally a club that one should strive to join."
Double-digit long-term growth might justify bragging rights for any country. But a turbocharged GDP comes at a price, says Eric D. Werker, an associate professor in the Business, Government and International Economy unit at Harvard Business School.
"Countries that attained double-digit growth are not unequivocally a club that one should strive to join," writes Werker in his April 2013 working paper, Learning from Double-Digit Growth Experiences, published by the International Growth Centre at the London School of Economics and Political Science.
Werker, who serves as economic advisor to Liberian president and Nobel Peace Prize-winner Ellen Johnson Sirleaf, a 1971 graduate of the Harvard Kennedy School, wrote the policy memorandum at the request of the Liberian government, which seeks fast growth of its own. To cement political and social stability, Liberia wants to rise from its current status as a low-income country to a middle-income one by 2030.
"The timeline could be two or three years, or a decade later"
While the International Monetary Fund predicted the country could achieve 6-7 percent annual increases in real GDP, Werker's analysis of 33 fast-growing countries suggests that it could grow even more quickly—that it could join the small number of nations achieving annual double-digit increases in real GDP. Liberia, Werker says, "could be the perfect storm for very fast growth."
The other question his study addresses is this: Is such hypergrowth even advisable? Would it bring more responsive government, passable roads, fair courts, and a quality education for citizens that the country's leaders desire?
The answers to those questions could help not only Liberia but also other countries pursuing rapid economic development as a panacea to their problems. Werker's research adds to a body of work, largely in Africa, that examines fragile states, foreign aid and investment, and conflict and governance.
Werker found his way to Africa after taking a leave of absence from teaching at HBS in 2009. "I was closing a chapter on my research looking at poverty alleviation through foreign aid, and I wanted to further this research within the countries themselves," he says.
In Liberia, he met with Sirleaf and her economic advisors, who discussed the pressures to grow the country as well as to build the legal, regulatory, and government environment required to support citizens in the long term. The two goals can often be at odds, Werker says.
Sirleaf was elected president in 2005 after an interim government was set up to move the country toward a more stable democracy. Liberia recently celebrated a decade of peace, quite a change from two bloody civil wars between 1989 and 2003 that left the country torn apart by warlords notorious for using child soldiers and quarter of a million people dead. (UN peacekeepers plan to stay in place until 2017.)
Werker says Liberia remains a complex and fragile situation, but with great promise.
"Long-run prosperity is by no means assured. The legacy of the war itself is a challenge," he says. "You are working with a displaced population, grievances remain across ethnicities, and there are high and often unrealistic expectations of government."
Liberia has many infrastructure challenges as well. It is one of the rainiest lands in the world, making many of its roads impassable half of the year. There's little electricity generated, about enough to power a small university campus, to serve the entire country. And the educational system suffered for years during the civil war.
Investing in Growth
Still, Liberia's economic team expects at least 6-7 percent GDP growth per year but believes that double-digit growth, a rare economic outcome overall in Werker's research, will be required to meet the expectations of the electorate and create greater political stability.
Liberia's economic strategy sees higher-level growth over the next five years coming from investments in mining, agriculture, and oil. That optimism may be warranted, according to Werker's analysis.
"If multiple iron ore mines come on stream, oil is discovered, and aid continues, then Liberia would be unlikely, in our opinion, not to grow at double-digit rates from the moment that the ore is exported in quantity, so long as market conditions for natural resources remain strong," the report concludes.
But growth in a developing economy can be unpredictable. Take mining, for example. Investors may secure a promising iron ore asset but drag their feet in developing it while waiting for mines elsewhere to deplete. Even after a decision is made to mine, the infrastructure must be built to bring the resources to port.
"The timeline could be two or three years, or a decade later," Werker says.
Liberia, in any case, wants to prepare. Sirleaf asked Werker to quickly write the IGC briefing for her economic team that "would distill the experiences of other countries that have achieved sustained double-digit growth in real GDP." (Sustained double-digit growth is defined as a compound annual growth rate of 10 percent or more over a period of eight years or longer.)
In the research, Werker looked at all 33 "episodes" of double-digit growth within countries from 1960 to 2010, using roughly 50 indicators that are associated with growth, divided into six categories: macroeconomic, finance, sources of GDP, human development, business environment, and governance.
He compared countries' double-digit growth occurrences to those in countries with episodes of sustained growth of 6-7 percent. The countries perceived as the biggest economic successes during that time period included Botswana, Chile, China, Hong Kong, Ireland, Japan, Singapore, and South Korea.
"It will take a couple of generations to change the lives of regular Liberians"
(Only China was on the double-digit list for the duration of Werker's study. Hong Kong, Japan, and Singapore grew in double digits at the beginning of their economic ascent but slowed, while Chile, Ireland, and South Korea didn't appear on the double-digit chart at all.)
In the report Werker identified shared characteristics of double-digit growers; conditions that often weren't sustainable. He found that natural resource exports were a crucial driver in 17 of the incidents of high growth, while 13 were pushed along by political reforms or economic diversification, most of which were temporary. Nine featured foreign aid and remittances playing a significant role, and another nine benefited from the catch-up following low-income levels caused during war or conflict. Five incidents were credited, or partially credited, to government spending on infrastructure or jobs.
In most cases accelerated growth proved a two-edged sword. Angola, for example, thrived due to diamond and oil exports after the country's civil war ended in 2002. Still, Werker says, Angola is one of the world's most poorly run governments, with its ruling power controlling most of its resources.
Although Nigeria's oil boom from 1968 to 1976 created many jobs for Nigerians and increased income to the "elites and their clients," government expansion did little to improve the country's infrastructure or political capacity.
Overall, the double-digit fraternity exhibited a worse performance on every indicator of the quality of the business environment compared to the 6-7 percent growers, according to Werker's study.
"Legal rights were weaker, it took more time to register property [and] more money to start a business, and there were higher corporate taxes and informal payments to government officials. Infrastructure was poorer for the group of double-digit growers, with lower electricity consumption, fewer paved roads, and fewer Internet users," he writes.
That wasn't all. "Almost all broad measures of governance were also weaker for the double-digit growers. Indexes measuring the quality of business regulation, fiscal policy, public administration, property rights, and transparency all showed worse performances. Representative democracy, as measured by the proportion of parliamentary seats held by women, was also weaker among the double-digit growers."
Liberia's profile, he says, resembles "pieces of lots of other countries," but is most like Sierra Leone, which was also founded by repatriated North American freed slaves. Both countries have a small population and have suffered overlapping conflicts. "They're siblings as far as nations go, and their paths to recovery are likely to be similar."
Sierra Leone relied heavily on diamonds as its export during double-digit growth from 1999 to 2008. During that time, the country worked to create a mining community development fund that would give workers a stake in the legal mining trade. Today, the country still faces instability and corruption.
Is Liberia Different?
Liberia appears committed to a double-digit expansion rate but its economic team seeks to create as much "broad-based" growth as it can, so that the benefits of growth accrue to mainstream citizens.
Werker, who has visited Liberia and other African countries more than a dozen times when he was a fellow at Harvard's Center for International Development, has confidence that Liberia has the ability to strike a balance between growth and stability. Among the strengths working in its favor, he says, are transparency and macroeconomic stability.
Still, he suggests, Liberia should consider an approach that favors sustainability and gains that are irreversible.
"It will take a couple of generations to change the lives of regular Liberians," Werker says. "You have to have mid to high single-digit growth, and you need to do that for 40 years."