qian ucsd conference

Beyond the Washington ConsensusNew Directions for Development StrategyPanel 3Lessons from Policy Reform in Emerging Economies: 

Beyond the Washington Consensus New Directions for Development Strategy Panel 3 Lessons from Policy Reform in Emerging Economies Yingyi Qian Department of Economics University of California, Berkeley

The Case of China: 

The Case of China 25 years of sustained growth since the reform began in 1979 From a poor, centrally planned economy (US$200 per capita) to a lower middle-income, emerging market economy (US$1,000 per capita) A spectacular growth in the largest developing and transition economy

A General Observation: 

A General Observation China’s growth occurred not because of the implementation of the institutional reform as in the post Washington consensus rule of law independent and uncorrupt courts democratic government transparent financial system good corporate governance dominance of private ownership in the economy

Reconciling the Tension (1): 

Reconciling the Tension (1) What makes the growth happening is mainly and ultimately the orthodox, standard, and universal forces of Getting incentives right Letting competition in

Reconciling the Tension (2): 

Reconciling the Tension (2) What have unleashed these forces are the unorthodox, nonstandard, and context- specific institutions unconventional forms (form vs. function) “second best” is a rule rather than exception

Rethinking the Standard Approach to Institutional and Policy Reforms: 

Rethinking the Standard Approach to Institutional and Policy Reforms Common approach: A menu of desirable (i.e., best-practice) institutions Index of institutional quality Often a mix of “rules” and “outcomes” (e.g., expropriation index) Cross country regressions Fit is too good Fit is not good enough Best-practice institution is best viewed as a benchmark, not as a general policy guide

From Best-Practice Institutions to Appropriate Institutions: 

From Best-Practice Institutions to Appropriate Institutions Appropriate Institutions: that unleash the standard forces but are suitable for the local conditions Why? All institutions have costs which vary according to local conditions Institutions only work under certain conditions Determinants of appropriate institutions (1) Opportunities and binding constraints (2) Development stage (3) Institutional environment

Appropriate Institutions (1):Opportunities and Binding Constraints: 

Appropriate Institutions (1): Opportunities and Binding Constraints Opportunities change over time 1980s: Opportunities from the distortion of central planning: shortage and missing markets The first order problem: to invest and serve the markets 1990s: More sophisticated demand but expanded markets (including overseas) Need the government to give up ownership and transfer it to managers

Appropriate Institutions (1):Opportunities and Binding Constraints: 

Appropriate Institutions (1): Opportunities and Binding Constraints Binding constraints for China: A major constraint is how to change the government behavior toward entrepreneurs and let small firms to boom Product markets generally very (sometimes viciously) competitive, labor markets are very flexible Credit market is problematic but not the issue of first order importance

Appropriate Institutions (2):Development Stage: 

Appropriate Institutions (2): Development Stage By development status To fight poverty (very low income countries) To take off at lower level of development (low income countries) To sustain growth at higher level of development (middle income countries) By input use and technology Extensive growth; catching up Intensive growth; working on the frontier

Appropriate Institutions (3):Institutional Environment: 

Appropriate Institutions (3): Institutional Environment Unusual ownership form (e.g., TVEs and Sino-foreign joint venture firms) works when institutional environment does not feature a level playing field The establishment of special economic zones is a good strategy when distortions elsewhere are massive Non-transparent financial system makes sense in protecting private assets from state expropriation when other ways of protection are not credible

Lessons from China?: 

Lessons from China? Maybe still too early to draw definite lessons But: Hard to ignore the case of China China is not an anomaly The Chinese experience provides lots of food for thought in assessing and formulating development strategy It makes us reexamine our perspectives on institutional and policy reform