Developing countries must strengthen their internal institutions to speed economic growth and cut poverty - something even the poorest nations can achieve, the International Monetary Fund said on Wednesday.
In a study of the last 30 years, the global lender found good institutions thrive under two conditions: an economy free of monopolies over natural resources and a political situation where there are checks and balances on those in power.
"The transition to good institutions is more likely to occur in countries that are more open, have a greater degree of political accountability, have a higher level of education in the population, and are in the same region as countries with relatively good institutions," the IMF said in its World Economic Outlook. Even the poorest nations can make progress in this arena.
"For example, in Benin and Zambia institutional transitions were associated with an increase in output growth rates of 4 percentage points or more," it said.
Far from advocating a universal approach to reform, the IMF report said strategies to improve institutions should be tailored to each country. For example, China benefited from the creation of "township-village enterprises" as a stepping stone to full-fledged private ownership. "In contrast, many Central and Eastern European countries found it expedient to adopt standardised ownership forms and develop complete private ownership from the very onset of reforms, reflecting both enthusiastic attitudes toward the concept of a market economy and the prospect of EU membership," the report said.
Countries often push harder on reforms when striving for external goals, such as membership in the EU or World Trade Organisation, the IMF said, noting that trade openness significantly boosted the likelihood of institutional reform.
"The analysis ... reinforces the case for developing countries themselves to undertake ambitious trade liberalisation under the (WTO's) Doha Round," the IMF said.
The presence of good institutions in nearby countries also helped, with transitions clustered over the last 30 years in Asia, emerging Europe and Latin America.
Countries with large natural resource sectors tended to have the fewest improvements, the IMF warned, since the performance of exports depended mostly on market demand rather than innovation, openness or government accountability.
"Natural resource wealth often has a corrosive effect on institutions," the report noted.
The study raised questions about the role of aid in institutional reform, suggesting aid could actually delay reforms by postponing the inevitable economic pain of poor policy choices. But the evidence was mixed and the IMF urged further research on the link.
In an other report, the IMF said: the unbalanced pattern of international trade and investment flows reflects "diverse and unrelated regional developments" that call for a co-ordinated global rebalancing campaign.
"Contrary to the situation in the mid-1980s - the last period of significant global imbalances - when the imbalances were concentrated among a relatively small group of countries, the current situation involves a much wider set of players," the International Monetary Fund said in an analysis covering 46 countries accounting for over 90 percent of the world economy.
The Washington-based lender also said a dearth of investment lies behind the excess saving that is pushing interest rates down around the globe, and that rates would likely rise when investment picks up.
The fund said developments in industrial countries have played the biggest part in driving global saving and investment down since the late 1990s to near historic lows.
In contrast, saving has continued to rise in emerging markets, although investment has not recovered since collapsing during the Asian financial crisis, it said.
"Unusually low investment rates for this stage of the economic cycle have resulted in an excess supply of saving that may be contributing to the low level of real long-term interest rates," the IMF said.
"The evolution of investment is therefore likely to be a critical factor determining long-term interest rates going forward," it said, adding: "A return of investment to a more normal cyclical relationship with growth would likely put upward pressure on interest rates."
Former Federal Reserve Board Governor Ben Bernanke, now an adviser to President George W. Bush, has argued low long-term interest rates reflect a "glut" of global saving that has financed the record shortfall in the US current account, which has as its counterpart trade surpluses in Asia.
Some other economists have argued that budget deficits and plunging household saving in the United States, stemming from loose fiscal and monetary policies, lie behind the current account imbalances. But the IMF said that argument does not explain the low level of inflation-adjusted interest rates.
The IMF said the dearth of investment in emerging markets could also reflect a relative lack of profitable investment opportunities. In its analysis, the IMF renewed its call for actions around the globe to bring about better balance.
"Steps to raise saving in the United States, boost growth in Japan and Europe, and increase investment in Asia - including completing ongoing financial and corporate restructuring - and in oil-exporting countries would all move global current account imbalances in the right direction."
While the IMF said the United States needed to boost national saving, it said higher real US interest rates would have only a limited impact on the US current account.
The IMF also said joint action could reduce the risk of an abrupt readjustment should global investors tire of holding US dollar-based assets.
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