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Finance & Development
A quarterly magazine of the IMF
March 2006, Volume 43, Number 1

From the Editor

The Mystery of Growth
For policymakers around the world, finding ways to promote faster growth is a top priority. Economists tend to advise them that disciplined macroeconomic policies, structural policies that promote competition and flexibility, and strong institutions (given particular emphasis nowadays) provide a framework in which entrepreneurship and growth should flourish. But fleshing out this general prescription and gathering detailed evidence to support it has been extremely difficult. What exactly do economists know and not know about growth? What direction should future research and policymaking take? The March issue of F&D checked in with prominent players in this field to try to demystify growth.

Our collection of articles begins with the World Bank's recent major growth study, which concludes that there is no unique, universal set of rules to guide policymakers, as most development economists believed in the 1950s and 1960s but doubted in the late 1980s and early 1990s. The study urges less reliance on simple formulas and the elusive search for "best practices," and greater reliance on deeper economic analysis to identify each country's binding constraint(s) on growth. This is an idea that Harvard University's Ricardo Hausmann, Dani Rodrik, and Andrés Velasco have been pushing in recent years. They insist it's vital to separate out those reforms that are essential for growth from those that are merely desirable because of efficiency gains. F&D looks at their proposed growth diagnostics framework and how it fared in a recent Bank pilot study. We also spotlight two IMF studies that draw on new analytical methods to help developing country policymakers—who are counting on higher growth rates to help them dramatically reduce poverty—decide how to sustain and accelerate growth. And we follow the economics profession's discouraging quest for answers through decades of growth research.

Of course, developed countries care about growth, too. Although Europe and Japan—which together account for a bigger slice of global GDP than the United States—have recently picked up speed, over the past decade they've experienced a growth slowdown. F&D asks Martin Baily (Institute of International Economics) and Diana Farrell (McKinsey Global Institute) what these slow growers can do to rekindle growth. Their answer: encourage competition (especially in the services sector), which will, in turn, boost productivity growth, the most desirable source of growth in all economies.

* * * * *

Also in this issue, we highlight a new data set, assembled by the IMF's Gian Maria Milesi-Ferretti and Trinity College Dublin's Philip Lane, on external assets and liabilities for more than 140 countries from 1970 to 2004. In "Examining Global Imbalances," we learn that international financial integration has increased markedly, particularly among advanced economies, and especially so during the past decade. We also learn that, on average, U.S. investors have earned much higher returns on their assets than they pay on their liabilities, especially during 2002–04. As a result, the United States has been able to run large current account deficits over the past four years without experiencing a major deterioration in its net external liabilities.

Laura Wallace