Category Economy
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Economic Development and the “Six-Pack”

12 November 2014 Dr Adrian Saville, Cannon Asset Managers
Dr Adrian Saville, CIO of Cannon Asset Managers.

Dr Adrian Saville, CIO of Cannon Asset Managers.

Dr Adrian Saville, CIO of Cannon Asset Managers, on the keys to economic development and growth.

A primary aim of development economists is to identify the ingredients responsible for positive, sustained improvements in the incomes and, in so doing, help promote policies that lift the social well-being of populations. Examples of countries that have achieved such progress abound. At the head of the pack are countries such as South Korea and Singapore, which saw income/person rise over 10-fold between 1980 and 2013 to $23,000 and $53,000, respectively. Whilst these Asian Tigers head the list of emerging markets over the last three decades, the group of countries that have achieved substantial gains in recent times is as wide ranging and diverse as Chile, Estonia and Costa Rica, which each experienced at least a five-fold increase in per capita income between 1980 and 2013.

At first blush, the countries that have spearheaded economic development over the past 30 years appear to vary widely in their makeup, which begs the question “Do they display common economic, demographic or policy elements – or any other common ingredients – that can be fostered elsewhere?” Evidence of commonality could point the way to a path of sustained economic development for countries that are still playing catch-up. We have researched 120 countries over a period of 50 years and the results point to the existence of six main common elements.

The six factors – which we term the “six-pack” – include:

1. A high savings rate. This funds a high rate of investment in fixed capital that, in turn, underpins economic growth.
2. Access to improving healthcare. The state of a population’s wellness, and ongoing improvements in access to healthcare and healthcare infrastructure, support gains in socio-economic welfare.
3. Access to improving education. Rising education levels, with improved access to education and the education infrastructure, gives rise to higher economic growth.
4. A favourable demographic structure. If more people are entering the workforce than leaving it, this adds to the nation’s productive capacity and economic welfare.
5. A stable policy environment with effective institutions. Improving quality of a country’s institutions and policy, including monetary, fiscal and industrial policy and economic growth and development. Transparent policy-making and policy stability contribute as much to improvements in economic welfare as policies themselves. In essence, a transparent and stable policy setting translates into greater investment certainty.
6. Finally, the degree of economic openness. The extent to which the factors of production (goods, services and capital; people and ideas) are able to move freely between nations plays a role in determining growth and economic performance.

Anecdotal evidence provides strong support for the six- pack’s efficacy. As recently as the late 1980s, Costa Rica ranked as one of the poorest countries in Central America: per capita income was just $2,000, the unemployment rate stood at 20%, consumer price inflation reached 90% p.a. and 54% of the population lived below the poverty line. Yet just fifteen years later, Costa Rica boasted the highest living standard in the region.

This dramatic turnaround can be traced to José Figueres assuming the presidency in 1994 and his policies to improve Costa Rica’s six-pack ingredients. Initially, Costa Rica negotiated free trade agreements to open new export markets and established free trade zones to foster industrial activity. In 1997, thanks to these and other incentives, Intel located a microchip plant in Costa Rica, providing a massive boost to the economy. In just ten years, exports rose from 27% of gross domestic product (GDP) to 50%, with semiconductors and computer accessories replacing bananas and coffee as the country’s top exports.

By the early 2000s, other technological, pharmaceutical and service companies joined Intel’s investment in Costa Rica. Figueres also reformed and reorganised many public institutions including closing entities which were plagued with corruption such, as Banco Anglo Costarricense. In addition, his administration fixed infrastructure, including the National Railway System, and completely overhauled the state-owned electricity provider, Grupo ICE. Figueres’ administration also launched several initiatives to improve national education, including reform to dedicate 6% of GDP to public education; introducing English as a second language in public schools from Grade 1; and installing computer labs in all high schools.

By 2010 Costa Rica’s price inflation had fallen below 10%, unemployment stood at 6% and, with a five-fold increase in per capita income, Costa Rica boasted the highest standard of living in Central America. Although no single ingredient can be flagged as responsible for Costa Rica’s remarkable development, it is evident from this case and, more importantly, the full set of 120 countries surveyed that a clear set of policies with consistent and effective implementation, the six-pack ingredients offer strong markers on the road to economic development and put substantial, sustainable gains in economic and social well-being within the reach of all countries.

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