The crisis:How bewildered should we feel?

Ricardo HausmannCenter for International Development &

Kennedy School of GovernmentHarvard University

Agenda

• New researchable questions in light of the crisis

• Not many• We reconfirmed many of the things we

learned in the 1990s• So, what should we be thinking about going

forward?

The crisis

• The biggest crisis in 70 years• …but not in Latin America• We have seen worse…– 1982, 1987-90, 1994-95, 1998-2002

• …making us focus a lot on crisis avoidance, resilience and management

What had RES done before the crisis?

• Volatility• Banking crises• Fiscal pro-cyclicality and solvency• Currency mismatches• Sudden stops• Monetary / exchange rate policy rules

The lessons before this crisis• The importance of inter-temporal fiscal solvency• …of liquidity

– Reserves, debt maturity• …of currency mismatches

– Debt denomination• …of tough and well supervised capital and liquidity requirements on

banks• …consistent exchange rate / monetary policy regimes• …credible communication with citizens and markets• …importance of counter-cyclicality in policy

– Space to be counter-cyclical– Ways of being counter-cyclical

What have we learned from this crisis?

• That we were right• Countries that followed the lessons managed

to cope with a very bad situation and look well going forward

• Countries that decided to disregard these lessons have been doing worse and look less well going forward

What have we not solved?

• How to accelerate the region’s growth of good jobs• Growth policies are high bandwidth• They involve hundreds of thousands of pages of

legislation• …and hundreds of public entities• They involve the provision of a very large set of rather

specific public inputs• Deeply interacting system• Impossible to be perfect• How to improve?

Two mental frameworks• Intelligent design vs. evolution– Full knowledge vs. search algorithms

• Central planning vs. the market• GM vs. Toyota– Central planning vs. decentralized problem solving

• Science vs. technology– General propositions vs. tinkering– The byclicle

• Economic theory vs. economic policy• The technocratic dream vs. the US congress

The challenge• Private inputs vs. public inputs– Why not the market?

• Information and prices• Incentives and profits• Capital markets and resource mobilization • How to elicit the information?– Toyota’s andon chords

• Why be responsive to that information?• How to design and evaluate solutions ex ante, given

complex interactions?• How to mobilize resources?

Elements of a “market” for public inputs

• Information hubs– Industrial zones– Development banks– Investment promotion agencies

• Trade associations• Transparency• Democracy• Narrative