Transcript Document

Goodbye Washington Consensus,
Hello Washington Confusion?
Economic Growth in the 1990s:
Learning from a Decade of Reform
Veronica Ivanova, EERC 2007
by Dani Rodrik
Dani Rodrik on development
strategies:
• “Stabilize, privatize, and liberalize” became the
mantra of a generation of technocrats who cut
their teeth in the developing world and of the
political leaders they counseled.”
• There was more privatization, deregulation and
trade liberalization in Latin America and Eastern
Europe than probably anywhere else at any point
in economic history.
• The one thing that is generally agreed on about the
consequences of these reforms is that things have
not quite worked out the way they were intended.
Washington Consensus 1990
Deregulation
Fiscal discipline
Secure Property Rights
Openness to FDI
Reorientation of
public expenditures
Tax reform
Financial
liberalization
“Stabilize,
privatize
and
liberalize”
Privatization
Trade liberalization
Unified and competitive
exchange rates
Washington Confusion 2006
Countries that followed the rules:
Latin America:
- frequent, unpredicted and painful financial crises; less growth in
1990s in per-capita GDP than in 1950-80;
Sub-Saharan Africa:
- despite significant policy reform, improvements in political and
external environments, continued foreign aid, fail to take off;
Eastern Europe:
- unexpectedly deep and prolonged collapse in output (many
countries had still not caught up to their 1990 levels); frequent,
unpredicted and painful financial crises;
Countries that did not:
China, India:
- rapid economic growth, high levels of trade protection, lack of
privatization, extensive industrial policies;
World Bank (2005)
The World Bank’s Economic Growth in the 1990s: Learning from a
Decade of Reform (2005, henceforth Learning from Reform) is a new
view on development from the World Bank
“The central message of this volume,” Gobind Nankani, the World Bank
vice-president who oversaw the effort, writes in the preface of the book,
“is that there is no unique universal set of rules…. [W]e need to get away
from formulae and the search for elusive ‘best practices’….” (p. xiii).
The evidence that macroeconomic policies, price distortions, financial
policies, and trade openness have predictable, robust, and systematic
effects on national growth rates is quite weak—except possibly in the
extremes.
IMF (2005)
•reform did not go deep and far enough
•the standard policy reforms did not produce lasting effects if the
background institutional conditions were poor. sound policies needed
to be embedded in solid institutions;
IMF (2005)
Corporate
Governance
Fiscal discipline
Prudent CA opening
Openness to DFI
Financial codes
Deregulation
and standards
Secure Property Rights
Social safety nets
Reorientation of
public expenditures
“Stabilize,
Anti-corruption
privatize
Privatization
and
liberalize”
Targeted poverty
reduction
WTO agreements
Tax reform
Independent CB’s
inflation targeting
Financial
Trade liberalization
liberalization
Non-intermediate
Flexible
exchange rate regimes
labor markets
Unified and competitive
exchange rates
UN Millennium Project (2005)
- views current levels of foreign aid to be a significant constraint
on the achievement of global poverty reduction.
- the theory underlying the U.N. Millenium Project’s view of the
world is that low-income countries in Africa (and possibly
elsewhere) are stuck in a low-level equilibrium, a “poverty trap”
- Africa is special because it suffers from high transport costs, low
productivity agriculture, a very heavy disease burden, adverse
geopolitics, and slow diffusion of technology from abroad;
WB, IMF & UN Key Words
WB
selectively remove binding
constraints on growth
IMF
get institutions right
UN
foreign aid to move out of the
“poverty trap” and boost
growth
What can be done?
Danni Rodrik:
“…the obsession with comprehensive institutional reform
leads to a policy agenda that is hopelessly ambitious and
virtually impossible to fulfill.”
“…the focus on institutions has potentially debilitating side
effects for policy reformers. Institutions are by their very
nature deeply embedded in society. If growth indeed
requires major institutional transformation—in the areas of
rule of law, property rights protection, governance, and so
on—how can we not be pessimistic about the prospects for
growth in poor countries?”
Danni Rodrik: practical approach
Step 1: Growth Diagnostics
Step 2: Policy Design
Step 3: Institutionalizing Reform
Growth Diagnostics
Policy Design
- operate in second best environment due to economic distortions
or political/administrative constraints
- China: objective to spur private investment and entrepreneurship
first-best response – institute property rights (as transition
economies did)
second-best response (in the absence of effective judiciary) –
township and village enterprises
- South Korea, Taiwan, China: objective to enhance country’s
participation in world markets
first-best response – reduce/eliminate barriers to imports and
foreign investment
second-best response – export targets and subsidies; special
economic zones
Institutionalizing Reform
- binding constraints change over time
- sound institutions are needed to sustain growth: ongoing
diversification into new areas of tradables (East Asia focuses on
technology development)
- strengthening of domestic institutions of conflict management
(countries resilience against external shocks: terms of trade
declines or reversals in capital flows)
- absence of specific blueprints – case-study approach