What the growth evidence shows : What the growth evidence shows Importance of: Macroeconomic stability Low inflation and debt sustainability Incentives Sustained increase in private profitability of production and investment, particularly in tradables and non-traditional activities Social protection Prevention of social conflict through institutions of conflict management


What the growth evidence does not show:: What the growth evidence does not show: Periods of high growth are hardly ever instigated by the adoption of Washington Consensus policies Periods of high growth are hardly ever instigated by policies aimed at deep integration into the world economy


Slide4: INSTITUTIONAL ARRANGEMENTS What type of property rights? Private, public, cooperative? What type of legal regime? Common law? Civil law? Adopt or innovate? What is the right balance between decentralized market competition and public intervention? Which types of financial institutions/corporate governance are most appropriate for mobilizing domestic savings? Is there a role for “industrial policy” to stimulate investment in non-traditional areas? UNIVERSAL PRINCIPLES Property rights: Ensure potential and current investors can retain the returns to their investments Incentives: Align producer incentives with social costs and benefits. Rule of law: Provide a transparent, stable and predictable set of rules. OBJECTIVE Productive efficiency (static and dynamic) Multiplicity of desirable institutional arrangements


Slide5: INSTITUTIONAL ARRANGEMENTS How independent should the central bank be? What is the appropriate exchange-rate regime? (dollarization, currency board, adjustable peg, controlled float, pure float) Should fiscal policy be rule-bound, and if so what are the appropriate rules? Size of the public economy. What is the appropriate regulatory apparatus for the financial system? What is the appropriate regulatory treatment of capital account transactions? UNIVERSAL PRINCIPLES Sound money: Do not generate liquidity beyond the increase in nominal money demand at reasonable inflation. Fiscal sustainability: Ensure public debt remains “reasonable” and stable in relation to national aggregates. Prudential regulation: Prevent financial system from taking excessive risk. OBJECTIVE Macroeconomic and Financial Stability


Slide6: INSTITUTIONAL ARRANGEMENTS How progressive should the tax system be? Should pension systems be public or private? What are the appropriate points of intervention: educational system? access to health? access to credit? labor markets? tax system? What is the role of “social funds”? Redistribution of endowments? (land reform, endowments-at-birth) Organization of labor markets: decentralized or institutionalized? Modes of service delivery: NGOs, participatory arrangements., etc. UNIVERSAL PRINCIPLES: Targeting: Redistributive programs should be targeted as closely as possible to the intended beneficiaries. Incentive compatibility: Redistributive programs should minimize incentive distortions. OBJECTIVE: Distributive justice and poverty alleviation


The logic of the Washington ConsensusA Chinese counterfactual: The logic of the Washington Consensus A Chinese counterfactual solution problem Low agricultural productivity Price liberalization Private incentives Land privatization Fiscal revenues Tax reform Urban wages Corporatization Monopoly Trade liberalization Unemployment Safety nets Enterprise restructuring Financial sector reform And so on...


Chinese shortcuts: Chinese shortcuts Household responsibility system and township and village enterprises obviate the need for ownership reforms Two-track pricing insulates public finance from the provision of supply incentives Federalism, “Chinese-style” generates incentives for policy competition and institutional innovation


Slide9: The empirical record and some answers 1. In practice, growth spurts are associated with a relatively narrow range of reforms; the rest comes later. South Korea and Taiwan since early 1960s Mauritius since early 1970s Brazil, Mexico, Turkey others before 1980 China since 1978 India since the early 1980s Chile since mid-1980s


Slide10: The empirical record and some answers (cont.) 2. The policy changes that initiate these growth transitions typically combine elements of orthodoxy with unconventional institutional innovations Outward orientation combined with industrial policies in East Asia; Partial) liberalization combined with household responsibility system and TVEs in China; EPZ in Mauritius; Capital controls in Chile.


Slide11: The empirical record and some answers (cont.) 3. Institutional innovations do not travel well. HRS works in China, but not in SU; ISI works in Brazil but not Argentina; EPZs work in Mauritius, but not in most other countries; Gradualism works well in India but not in Ukraine.


Slide12: The empirical record and some answers (cont.) 4. Sustaining growth is more difficult than initiating it Few transitions to high growth are sustained in the longer run Growth collapses in SSA, LAC Key weakness: lack of resilience to shocks Importance of using high growth period to build institutions that will endow the economy with resilience


Two prongs of a growth strategy:: Two prongs of a growth strategy: An investment strategy (short-run) An institution-building strategy (medium-run)


Some conclusions: Some conclusions The new, refurbished Washington Consensus is not a helpful guide to promoting economic growth. Experimentation is an important driver of economic development (both in the institutional and productive sphere). Such experimentation is fully compatible with (and indeed should be based on) sound economic principles, namely property rights, incentives, hard budget constraints, etc. The needs of the developing world are better served within a “thin” set of rules for global economic governance (as opposed to a “thick” set of rules aimed at maximizing trade and foreign investment flows).


Examples of successful “investment strategies”: Key is to get domestic entrepreneurs excited about investing in the home economy. Need a two-pronged strategy Encourage investments in non-traditional areas (carrot); Weed out projects/investments that fail (stick)  Empirical background: East Asia 1960-90: both incentives and discipline Latin America under ISI (1950-1980): incentives, but too little discipline Latin America in the 1990s: discipline, but too little incentives Examples of successful “investment strategies” Import-substituting industrialization (Brazil, Mexico, Turkey) Outward-orientation, East Asian style (South Korea, Taiwan) Outward-orientation, post-1983 Chile style (large real depreciation, saving mobilization, support for non-traditional exports, discouragement of ST capital inflows) Two-track reform (China, Mauritius)


Market-sustaining institutions: Market-sustaining institutions Market-creating institutions Property rights Contract enforcement Market-regulating institutions Regulatory bodies Mechanisms for correcting market and coordination failures Market-stabilizing institutions Monetary, fiscal, currency, capital-account arrangements Contract enforcement Market-legitimizing institutions Democracy Social insurance


Slide17: 11. Corporate governance 12. Anti-corruption 13. Flexible labor markets 14. WTO agreements 15. Financial codes and standards 16. “Prudent” capital-account opening 17. Non-intermediate exchange rate regimes 18. Independent central banks/inflation targeting 19. Social safety nets 20. Targeted poverty reduction   Original Washington Consensus The Augmented Washington Consensus


Slide18: The World Bank’s Star “Globalizers”*     *According to World Bank, Globalization, Growth, and Poverty, 2001, p. 6.