Goodbye Washington Consensus, Hello Washington Confusion?

1. Goodbye Washington Consensus, Hello Washington Confusion? Economic Growth in the 1990s: Learning from a Decade of Reform Veronica Ivanova, EERC 2007 by Dani Rodrik

2. 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.

3. Washington Consensus 1990 Deregulation Secure Property Rights Fiscal discipline Openness to FDI Reorientation of public expenditures “Stabilize, privatize and liberalize” Tax reform Privatization Financial liberalization Trade liberalization Unified and competitive exchange rates

4. 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;

5. 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.

6. 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;

7. IMF (2005) Corporate Governance Financial codes and standards Social safety nets Prudent CA opening WTO agreements Anti-corruption Independent CB’s inflation targeting Targeted poverty reduction Non-intermediate exchange rate regimes Flexible labor markets Deregulation Secure Property Rights Fiscal discipline Openness to DFI Reorientation of public expenditures “Stabilize, privatize and liberalize” Tax reform Privatization Trade liberalization Financial liberalization Unified and competitive exchange rates

8. 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;

9. 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

10. What can be done? Danni Rodrik: “…the obsession with comprehensive institutional reform leads to a policyagenda 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?”

11. Danni Rodrik: practical approach Step 1: Growth Diagnostics Step 2: Policy Design Step 3: Institutionalizing Reform

12. Growth Diagnostics

13. 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

14. 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