Thailand enjoyed a fairly successful economic recovery following the collapse that triggered the Asian Financial Crisis. Yet, what marred the rather solid economic growth figures was the country’s inability to resolve its own political problems. These problems led to widespread public protests earlier this year, culminating with a military coup this week.
What happened in Thailand underscores the importance of looking beyond GDP growth figures. But, if it's not the growth rate that matters, what is it?
High rates of economic growth in some of the emerging markets are clearly hard to ignore. This week’s cover story of the Economist declares that emerging markets are the force to be reckoned with, as they are now surpassing the developed economies in several categories, including total output and energy consumption. But, there is one thing often missing in many of the discussions. It has to do not with rates of economic growth or economic output, but rather with its quality.
Quality of economic growth tends to be overlooked at the expense of rates of growth, yet it is nonetheless crucial if we think about sustainability of economic performance.
Any government would be proud to announce that its economy grew at a rate of 7% over the past few years. When compared to some of the developed economies growing at 2-3%, a growth rate of 7% seems like an even greater accomplishment.
But, what are the underpinnings of that growth? Is it sustainable? What do businesspeople think about the future? What’s going to happen ten years down the road? Are the necessary political institutions in place? These more interesting questions will result in completely different answers once the analysis starts to focus on individual countries instead of emerging markets as a whole.
The results will show that some countries have the potential to sustain their economic growth rates, but for others the future is murky. For a third group of countries, the future looks bleak. A closer look may also reveal that not all of the Asian Tigers will continue to enjoy economic success if things remain the way they are, and some countries in Latin America are moving in completely opposite directions. Economies in the Middle East and Africa have their own sets of challenges and there is a growing divide between the new member of the European Union and some of their former command-economy counterparts.
What we know from market theorists as well as from history is that long-term economic growth comes down to the quality of institutions, such as protection of property rights. It comes down to the ability of people to make their own decision in regards to their economic fate. It comes down to the ability of businesspeople to spend valuable resources on productive activities of their choosing. It comes down to the ability of companies to attract investment, both foreign and domestic. It comes down to people being able to reap the benefits of free trade. In other words, it comes down to economic freedom.
Take a look at this year’s Index of Economic Freedom, published by the Heritage Foundation and the Wall Street Journal. Economic Freedom Advances reads the headline of the press release. And it cautions that in Latin America, as well as in the Middle East and North Africa region, there are visible declines.
Look at the list of countries at the top of the index. Then look at the list of countries at the bottom of the index. What’s hard to miss is that many emerging markets still have a lot of work to do to catch up. Political institutions need to be reformed. Economic institutions need to be restructured. Economic freedom needs to be secured.
Mr. Thaksin has implemented some rather questionable policies, creating a divide between those whom such policies target and those who feel that they hurt the country’s economic potential by restricting economic freedoms. Political corruption, instability, and uncertainty have not helped to settle the situation.
High rates of economic growth in many emerging economies are today's reality, and many countries should be complimented on their accomplishments. For some, we should keep in mind that there is potential for so much more. For others, as Thailand has shown this week, solid growth rates should not come at the expense of political instability and long-term economic uncertainty.
So, look at the growth rates, look at investment flows, and look at government revenues – but keep economic freedom and politics in mind. Talk to the businesspeople, big and small, and see what they think about the future of their economy. Do they want to expand their businesses? Is doing business getting harder for them? Is corruption wasting their resources? They can probably tell you a lot more than a 10% growth in GDP could.