Home » Economic Growth Strategy » Executive Summary » Economic Growth Strategy in Context » Economic Growth Transforms Societies » 1. Key to Economic Growth is Rising Productivity » 2. Growth in Developing Countries is in U.S. Interest » 3. Much Has Been Accomplished » 4. Much Has Been Learned » 5. The International Environment for Growth in Developing Countries Has Never Been Better » 6. USAID's Strengths Determine Its Role » 7. USAID Will Promote Rapid, Sustained and Broad-Based Growth » 8. Three Principles Will Guide Economic Growth Programs » 9. Economic Growth in the Framework for U.S. Foreign Assistance » 10. Resources and Resource Allocation » 11. In Conclusion » References »
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A Strategy for Economic Growth

7.  Promote Rapid, Sustained, and Broad-Based Growth

USAID’s goal is to help countries achieve economic growth that is rapid, sustained, and broad-based. “Rapid” means growth of at least 2 percent per capita per year, and preferably faster.  Any developing country that grows at this rate will dramatically improve the living standard of its population within a generation.  Growth at this rate will also enable most low-income countries to meet the Millennium Development Goal of cutting extreme poverty in half within 25 years.  Experience shows that per capita growth rates of 3 percent, 4 percent, or 5 percent and higher are feasible, and lead to more rapid progress in reducing poverty and improving other measures of the quality of life. 

“Sustained” refers to growth that is maintained over the long term.  Sustaining a higher rate of growth requires continuing improvements in the drivers and enablers of growth, giving producers both the incentive and the means to keep adapting and improving.  In the many low and middle-income countries where natural resources play a large role in the economy, sustained growth also requires appropriate prices, clear and consistently enforced property rights, and other incentives that encourage responsible resource use.  Weak property rights discourage investment by creating uncertainly, while encouraging unsustainable resource-stripping like deforestation.  In the worst case, disputes over resource ownership can lead to violent conflict.  Meanwhile, inappropriate prices lead to costly and often irreversible decisions, as when low water tariffs contribute to the depletion of aquifers and salinization of farmland.  Inadequate environmental policies can lead to serious environmental and health impacts and stress to water, forests, energy, and other natural resource reserves.  To reduce these impacts and achieve truly sustainable growth, it is essential to develop and enforce sound environmental policies and regulations, to create incentives for private and public enterprises to invest in environmentally sound production technologies, and for households to adopt more environmentally friendly consumption practices.

“Broad-based” refers to growth that includes major income groups, ethnic groups, and women, and that significantly reduces poverty.  Growth in low-income countries has typically, but not always, met these criteria.  Donors and governments have a range of opportunities to reinforce the impact of growth on the poor and on specific groups; some are discussed below.

Three approaches will help achieve this goal

To help partner countries achieve rapid, sustained and broad-based growth, USAID will:

• Develop well-functioning markets, working with the drivers and enablers underlying growth, to create the conditions for sustained growth in productivity, output, and incomes;

• Enhance access to productive opportunities for the poor, women, and other disadvantaged groups, to help ensure that they benefit from growth; and

• Strengthen the international framework of policies, institutions, and public goods that support growth prospects and opportunities for poor countries.

These approaches are distinct but related.  Measures that strengthen the overall performance of markets, for example, also tend to enhance poor households’ access to economic opportunities.  Much of the microeconomic reform agenda falls into this category.  Similarly, measures to improve access will in most cases also improve the performance of markets. Nonetheless, most USAID interventions will be primarily directed toward one or another of these approaches, and should be judged accordingly. 

Developing well-functioning markets

This is the central challenge and the main area of opportunity for USAID.  Widespread improvement in macroeconomic policies and the capacity to implement them means that microeconomic distortions to the business climate have emerged as the binding constraints to growth in many countries.  Nevertheless, certain aspects of macroeconomic assistance will remain important in many situations, including:

• Fiscal policy and administrative reform, to help countries adopt tax systems that are fairer, easier to implement, less vulnerable to corruption, and less distorting to economic activity, and to help them develop the administrative capacity to implement tax policy transparently and accountably.

• Monetary policy and capacity-building, to help central banks apply exchange rate and interest rate policies that respond to the market and contribute to the development of a healthy financial sector. 

In the emerging field of microeconomic reform, in-country presence has helped USAID develop many areas of strong comparative advantage, allowing it to become a leading supporter of such reforms in the developing world.36   In many cases, success has involved working with business associations to identify the most burdensome regulations and lobby for their simplification or removal.  Another approach involves working with both governments and private stakeholders to reform laws and strengthen the institutions that carry out functions of economic governance essential for the efficient operation of markets.  Important areas include:

• Reforming regulatory systems to reduce barriers to entry, foster competition, and remove obstacles to enterprise growth.  In general, greater reliance on market forces and less on administrative discretion promotes faster productivity growth and reduces the scope for corruption;37 ,38

• Strengthening systems to establish and enforce property rights39 to reduce investment risks; and

• Developing systems of commercial law and the public and private institutions needed to implement them effectively, transparently, and accountably, including judicial and alternative systems of dispute resolution and enforcement.

Other areas where USAID can work to improve the functioning of markets include:

• Agricultural development programs to help increase the productivity of farmers, agricultural input distributors, and food processors, and to improve their access to domestic and export markets.  Developing well-functioning markets stimulates growing demand for cost-reducing and quality-enhancing technologies from USAID-supported agricultural research.  Increased productivity within the agricultural supply chain boosts the income of farms and related businesses, and helps them diversify into high-value, labor-intensive products, contributing in turn to more rapid growth in other sectors and in the national economy. In countries where agriculture accounts for a large share of national income, increased agricultural productivity can play an important role in boosting productivity and income overall. In addition, a more nutritious, stable, abundant, and lower-cost supply of food and fiber raises the real incomes of urban residents and improves the health and productivity of the workforce.  Opportunities for promoting agricultural development are covered in much greater detail in USAID’s 2004 Agriculture Strategy: Linking Producers to Markets.40  

• Support for infrastructure to better serve growing populations, including in urban areas where economies of scale can boost efficiencies in the production and distribution of services from electricity to health.  USAID will finance little infrastructure directly, except for post-conflict and post-disaster reconstruction and in some strategic states.  But USAID has worked successfully, and will continue to work in many countries to improve policies in energy, telecommunications, water, transport, and housing in ways that leverage the economic impact of infrastructure investments by others.  Power grids and other networked infrastructure often represent “natural monopolies.”  As such, they require government oversight and competent, transparent, and accountable regulatory institutions to maintain an enabling environment that ensures good performance, rational prices, and environmental protection, while encouraging much-needed private investment.

• Trade capacity-building, which complements and integrates many other categories, and which assists countries to participate in the global trading system.  Training and technical assistance help countries analyze and participate in international trade negotiations, implement commitments made in trade agreements, facilitate the efficient import and export of goods and services, and build the supply-side capacity needed to participate in the global trading system.  Trade enhances the competitive forces that drive productivity change and growth.  Opportunities in trade capacity-building are the focus of a complementary USAID strategy, issued in 2003. 

• Financial sector reform and capacity-building to encourage the growth of competitive financial systems while strengthening transparency and supervision to enhance the stability of financial markets.  Financial sector performance strongly affects productivity growth: where spurred by competition, banks and other financial firms must search for the most productive investments to finance, rather than simply relying on business from established clients.41   By doing so, they enable entrepreneurs to invest in new technologies and expand rapidly in response to new market opportunities.  Priority should be given to systemic reforms and capacity building to help mobilize savings and channel domestic and international private capital to support productivity growth, rather than financing development directly.42  

• Enterprise development and privatization to help accelerate the private sector response to an improving business climate by facilitating the flow of knowledge and expertise to firms and industries that would otherwise adjust slowly.  Privatization, when done well, improves the incentives for business managers and owners to enhance the productivity of their enterprises.  Developing a local capacity to provide business services and education to local firms can help enterprises adapt to changing environments.  Synergies can be developed with other areas of USAID focus.  The development of private ecotourism industries, for example, facilitates enterprise growth with specific benefits for environmental and natural resource sustainability.

• Workforce development to ensure that young people and adults can gain the vocational skills they need to find jobs and remain productively employed in a changing economy.  The private sector holds a strong comparative advantage in delivering the job skills demanded by the market.  Where appropriate policies are in place, private sources of training emerge to deliver job skills, either on-the-job or through stand-alone training providers.  As a result, priorities include lifting burdensome regulations that discourage private sources of skills training, and limiting subsidized competition from government training facilities.  USAID’s 2005 Education Strategy briefly reviews priorities in workforce development.43

The potential for improvements in these different areas to contribute to faster and more sustained growth will differ considerably from one country and one region to another, as will the opportunities for achieving such improvements.  Setting programmatic priorities among them is beyond the scope of this strategy.  Rather, such priorities should be set on the basis of specific country circumstances, after careful consideration by experienced economic growth experts with a clear understanding of those circumstances. 

Enhancing access to productive opportunities

Faster growth is the basic source of new economic opportunities for the poor as well as the non-poor.  Many of the microeconomic distortions that impede growth arise from policies adopted to advance the economic interests of elites relative to those of the politically less powerful.  Correcting such distortions can be especially beneficial for poor people, women, and other disadvantaged groups.  Even in a sound policy environment, however, economic and social obstacles may still limit access to emerging oppor­tunities.  USAID works to identify and remove such obstacles.  Some of these interventions fall outside the scope of economic growth programs.  In particular, arguably the most powerful means to improve economic access is to expand the coverage of basic education to include more poor children and girls, while improving educational quality so that all children gain literacy and other basic skills.

Other interventions to enhance access to opportunity fall squarely within the scope of economic growth programs.  These often run parallel to those aimed at strengthening markets economy-wide, but are more sharply focused on the particular problems confronting the poor, including:

• Inadequate access to finance.  In many poor countries, poor households – and poor women in particular – lack safe places to keep their savings, lack access to credit due to their inability to offer collateral, and cannot obtain insurance to protect themselves or their businesses.44 Microfinance programs of USAID continue to address these problems, with a particular focus on women.

• Poor access to business services.  Along with finance, micro and small enterprises require access to non-financial business services such as technical and supply chain services in order to improve their productivity and allow them to participate in the global economy. USAID encourages development of local private providers of these services.

• Insecure land tenure and other property rights.  Lack of secure tenure to land is a particularly large threat to the poor, and especially for women who own less than 2 percent of all land in developing countries.  More secure rights to agricultural land encourage greater investments in irrigation and other land improvements, as well as more productive cropping patterns.  Urban land rights are also important.  USAID supports land titling, formalization of de facto tenant rights and, generally, the policies and institutions needed to making land and other property markets work for all. 

• Inflexible labor markets.  For workers to receive higher wages and contribute to rising productivity, labor markets must continuously create new jobs and help workers move from less productive to more productive employment.  Excessive job protections make it risky for firms to hire full-time employees, leaving many poor workers – especially youth – either unemployed or stuck in low-paying jobs in agriculture or the urban informal sector, where they enjoy neither benefits nor legal protections.  USAID encourages countries to reduce unnecessary barriers to job creation and labor mobility, helps improve workers’ job skills and productivity, assists firms in understanding how good labor practices can contribute to productivity and competitiveness, encourages governments to adopt policies that respect internationally recognized core labor rights, and facilitate their design and implement flexible and effective labor protections and benefits programs. 

• Weak and inaccessible judicial systems.  In most developing countries, poor people lack access to an independent and impartial justice system.  This disenfranchises the poor in cases where the powerful infringe on their rights.  Women often suffer an additional disadvantage, holding fewer legal rights than men in key economic areas such as land ownership and inheritance.  USAID works to strengthen judicial systems and encourage equal rights for women.

• Burdensome business regulation.  In many countries, regulatory obstacles to operating a formal enterprise cause many firms to remain in the informal sector, where opportunities for growth (and access to finance) are limited.45   Women constitute the majority of those working in the informal sector in many countries, and so are particularly affected.

• Inadequate infrastructure.  Many poor countries have inadequate basic infrastructure (water, sanitation, electricity, roads, etc.) in urban centers and even more limited coverage in rural areas.  Small farms, small and microenterprises, and low-income households generally have the poorest access.  For example, inadequate and poorly maintained roads raise the prices farmers pay for fertilizer and other inputs, while depressing the prices they receive for their marketed surpluses.  Policy changes that lead to better coverage and quality can offer greater opportunities for growth and help connect the poor to those opportunities. 

Strengthening the international framework of policies, institutions, and public goods

This approach spans efforts carried out on a global or multilateral basis rather than through country programs.  Examples of such efforts include: 

• Developing new knowledge important to poor countries.  The Centers for International Agricultural Research have long demonstrated their value in raising agricultural productivity in poor countries.  The rates of return to agricultural research are high.46   USAID-funded smallpox research conducted in West Africa achieved a key breakthrough that allowed the disease to be eradicated worldwide within a few years.  USAID currently supports research on malaria and HIV/AIDS, among other major diseases affecting poor countries. 

• Supporting trade liberalization.  Multilateral trade liberalization has played a central role in promoting the growth of world trade within a framework of rules that ensures opportunities for rich and poor countries, and subjects both to the same rules in resolving disputes.  USAID strongly supports continued multilateral trade reform, which would spur economic growth in developing countries – especially to the extent to which it causes them to reduce barriers to trade amongst themselves.  Further reductions in trade barriers may also arise through regional and bilateral trade agreements and unilateral liberalization.  But whatever avenue trade reform takes, it usually prompts developing countries to pursue complementary economic policy reforms, which often boost their productivity and growth more than the liberalization of trade per se.

• Promoting international standards.  One of the most valuable contributions the international community can offer poor countries is the development and propagation of widely applicable, growth-supporting international standards – for customs operation,  business accounting, intellectual property, sanitary and phytosanitary regulations, financial market oversight, and in many other areas.  Access to information on international “best practice” via the internet helps poor countries understand and implement practices that can ease their engagement in the world of commerce.

• Supporting U.S. policies conducive to growth in developing countries.  At times, U.S. policies are formulated with little recognition or consideration of their economic impact on developing countries.  More active participation by USAID in interagency decision-making processes can help achieve greater balance among competing U.S. interests, ensure that development is duly considered as a priority of U.S. foreign policy, and thus contribute to the adoption of policies that better serve the broad, long-term interests of the United States.