Leadership

Nobel Laureates Michael Spence and Paul Krugman offered competing opinions on the potential effectiveness of U.S. Treasury Secretary Tim Giethner's latest proposal to cleanse ailing banks of toxic assets. While Spence acknowledges that the plan is complex, he believes it is a step in the right direction. Krugman on the other hand believes Geithner is following the steps of former Secretary Hank Paulson in offering "cash for trash". Read more about it in Bloomberg's coverage of the debate here.

Growth Commission Chair Michael Spence was a guest on CNBC's Squawk Box this past week, where he discussed the Fed's recent announcement that it will purchase $300 bn in long term U.S. Treasury Bills, adding to the $750 billion worth of agency backed mortgages it plans to purchase this year. Spence lauded this move by the Fed, and stressed that the key to recovery is to unfreeze the credit markets. Additionally, Spence emphasized the attention that must be paid to making sure that developing countries recover from this crisis.  Inevitably, he said, the western countries will recover, but due to an increased propensity to save, they will not likely drive the same levels of aggregate demand that existed before the crisis. This shortfall will only be made up if recovery in the developing world keeps pace with the industrial countries. To watch the interview, please click here.

In a sobering editorial in Tuesday’s Financial Times, Trevor Manuel, the Finance Minister in South Africa, and member of the Growth Commission, presents the very real dichotomy facing a world searching for a way out of the current financial crisis.  On the one hand, world leaders can band together and “find appropriate instruments of governance through which the propulsive power or modern finance can be harnessed to serve a development agenda”. On the other hand, a failure to do so will result in “growth and social progress” continuing to be the “bonded servants of finance capital”.

The impact of the current financial crisis on the developing countries and the slide of the major industrial countries into recession pose several interesting questions for the international community and the growth commission which released its report in 2008.

Two of these questions/issues will be singled out for attention in this brief note.  Firstly, the Commission predicated its findings on an open and expanding global economy in which developing countries could import ideas, technology and know how from the rest of the world, and, secondly, the importance of leadership, effective government and experimental policy making to facilitate poor countries in achieving high and sustainable growth rates over an extended period of time.

The Commission on Growth and Development’s Growth Report (GR) recognizes that a major problem confronting low- and middle-income countries is how to build effective governments where they do not exist.  This fundamental problem in comparative politics dates back at least to Aristotle’s categorization of city-states according to their performance in The Politics. 

Once upon a time, a commonly-held view was that many aspects of economic development—such as the spread of prosperity, mass consumption, and social mobility—and of political development (the emergence of good government) were parts of a shared process of “modernization.”

The global financial and economic crisis highlights the need for effective means of coordinating complementary national policy responses into workable international action. This seems to me to require in turn an international financial architecture that emphasizes the sustainability of national and cross-border financial institutions, instruments and regulations. The international financial architecture needs a major infusion of transparency and forward-looking regulatory practices. Neither will be simple to conceptualise or implement.