Goodbye Washington Consensus, Hello Washington Confusion?

Economic Growth in the 1990s: Learning from a Decade of ReformVeronica 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

Secure Property RightsSecure Property RightsDeregulationDeregulation

Fiscal disciplineFiscal discipline

PrivatizationPrivatization

Reorientation of Reorientation of public expenditurespublic expendituresOpenness to FDIOpenness to FDI

Tax reformTax reform

Unified and competitive Unified and competitive exchange ratesexchange rates

Trade liberalizationTrade liberalizationFinancial Financial

liberalizationliberalization

“Stabilize, privatize

and liberalize”

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.

•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)

“Stabilize, privatize

and liberalize”

Secure Property RightsSecure Property Rights

DeregulationDeregulation

Fiscal disciplineFiscal discipline

PrivatizationPrivatization

Reorientation of Reorientation of public expenditurespublic expendituresOpenness to DFIOpenness to DFI

Tax reformTax reform

Unified and competitive Unified and competitive exchange ratesexchange rates

Trade liberalizationTrade liberalizationFinancial Financial liberalizationliberalization

Social safety netsSocial safety nets

Targeted poverty Targeted poverty reductionreduction

Corporate Corporate GovernanceGovernance

Anti-corruptionAnti-corruption

Financial codes Financial codes and standardsand standards

Prudent CA openingPrudent CA opening

Non-intermediate Non-intermediate exchange rate regimesexchange rate regimes

Flexible Flexible labor marketslabor markets

WTO agreementsWTO agreements

Independent CB’s Independent CB’s inflation targetinginflation targeting

IMF (2005)

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

WBselectively remove binding

constraints on growth

IMF get institutions right

UNforeign 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: Step 1: Growth DiagnosticsGrowth Diagnostics

Step 2: Step 2: Policy DesignPolicy Design

Step 3: Step 3: Institutionalizing ReformInstitutionalizing 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 entrepreneurshipfirst-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 marketsfirst-best response – reduce/eliminate barriers to imports and foreign investmentsecond-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