Lessons from the 1990s Results and Operational Implications

1. Lessons from the 1990sResults and Operational Implications Gobind Nankani Country Directors Retreat October 6, 2004

2. Presentation Outline • Motivation • Lessons • Operational Implications (preliminary)

3. Motivation for Lessons of the 1990s • Uneven responses to reform, results challenged expectations • An extraordinarily eventful decade • Board and Management requested it • Perceptions that the Washington Consensus is no longer valid—why? and what lessons?

4. Analysis informed by Experience • Initially internal audience. Following OVP review, now external also • Three perspectives: analytical, policy, and operational • Focus on shared growth • Integrates analysis and voice of experience (Bank and non-Bank)

5. Lessons from the 1990sGrowth, central to poverty reduction Source: Dollar and Kraay (2001), from sample of 285 country-years over 1950-1999

6. Lessons from the 1990s Growth in the 1990s: Challenged Expectations • Record clashed with expectations: • No set formula of success: China, India, Vietnam, Chile, Indonesia, Botswana, Tunisia, Egypt • Growth below expectations in AFR & LAC, despite reform (Bolivia, Malawi, El Salvador, Brazil) • Length and depth of ECA recession, and uneven recovery (Poland v. Ukraine) • Multiple financial crises: Mexico 1994, EAP 1997, Russia & Brazil 1998, Turkey 2001, Argentina 2002

7. Lessons from the 1990s Growth in the 1990s: A Mixed Record(divergence “big time”) EAP SAR OECD LAC MNA AFR ECA

8. Lessons from the 1990s LAC: Steady Reform, Erratic Growth

9. Lessons from the 1990s Understanding the 1990s • Expectation: Right policies lead to 5-7% growth anywhere • But we learned they don’t... • Is it because? • ...more reforms are needed (Morocco, Argentina, Mexico?) • ...reform takes more time than expected? Recovery is underway already in LAC, AFR, ECA • ...errors were made (capital account, banks with open f/e exposure, appreciation of currency, institutional shortcomings) • ... focus was on correcting government failures, not market failures • ... initial conditions, institutions, policies, external factors differed • Some of these apply, ... but the experience of the 1990s o suggests deeper lessons...

10. Lessons from the 1990s • Unrealistic expectations about what reforms could achieve (macro, finance, trade, finance, privatization) • Common principles, multiple paths for implementation: no two successes are alike; policies and institutions perform functions, but functions (accumulation, sharing, efficiency, technology) does not determine form. • Country specificity. Successful growth strategies are country specific, no formulae. • Binding Constraint: need to focus on binding constraint, not any constraint • Centrality of institutions, government discretion, and checks on discretion. We thought we could roll back the government and substitute rule for discretion (Argentina) • Need to change the mindset: expertise tempered by humility, strengthened by inquisitiveness

11. When you get right down to business, there aren’t too many policies that we can say with certainty deeply and positively affect growth.”(Harberger, IMF Survey, July 2003, p.216) • “Therefore, the real lesson for the architects of growth strategies, is to take economics more seriously…”(Rodrik, Growth Strategies, September 2003, p. 30)

12. Lessons from the 1990s Macro • Premature liberalization of inflows • Excessive recourse to external debt • Neglect of decision making processes, institutions, rules (e.g. cyclically adjusted deficits, treatment of public investment) • Over-emphasis on improving simplistic indicators (i.e., inflation, fiscal deficits regardless of debt structure or composition of spending)

13. Trade • Openness to trade has been a key element of successful growth strategies • Tariff reductions is just one element of what is needed to integrate an economy • Many possible paths to open an economy—tariffs are only one element • Distributive effects of trade liberalization vary—not always pro-poor • The world trade system needs a better balance between the interests of industrialized and developing nations.

14. Lessons from the 1990s Lessons from Development Practitioners • An impressive list of speakers enabling practical perspective to complement analytical findings • Themes from Practitioners’ lectures: • Rigor, no formula, country ownership and specificity: Gaidar, Ahluwalia, Botchwey, Dervis, Blejer, Rima Khalaf • Sharing the benefits of growth: Foxley, Cardoso, Aninat) • Focus on the binding constraint: Foxley

15. Lessons from the 1990s Lessons from Former CDs • Successful strategies are: • Country-specific • Selective: address binding constraints, in the right sequence, as they emerge • Sensitive to institutional endowments, time dimension, and humility in approach • Successful growth experiences result from strategy, not universal policy packages

16. Lessons from the 1990s Sensitivity to Institutional Endowments • “An unfortunate consequence of our over-emphasis on privatization was that it distracted from other efforts to promote private sector development. Early Bank assessments of the post-war situation [in Bosnia-Herzegovina] recognized that privatization would be insufficient to meet the employment needs of the population, and that providing an enabling environment for private enterprise, particularly of small and medium-sized firms, would be crucial. Yet in our intense focus on getting voucher privatization right, we neglected the needs of smaller firms, and we overestimated the adequacy of the institutional environment to support their functioning.” • Chrik Poortman

17. Lessons from the 1990s Selectivity • “Since 1978, the Chinese government has had an uncanny ability to carefully consider the main constraint on sustained development, and to focus on it until it is resolved. Hence Deng began with an emphasis on the agricultural sector, and only after progress appeared self-sustaining did he turn to the next issue, that of developing the eastern seaboard through trade and investment. Reform is anything but gradual for as long as the sector in question is the subject of the government’s attention.” • Yukon Huang

18. Lessons from the 1990s Country Specificity • “A continuing, grave problem..has been [the Bank’s] propensity to continue to search for, and sometimes claim that it has found, the ultimate answers to development. This pattern reflects the surprising belief that there may be a ready-made, relatively simple, permanent and definitive response to a specific problem of development that can be applied universally, that if it worked well here it will work well there…the question still remains: is the Bank sufficiently flexible to propose and offer solutions that might be much more differentiated among countries, solutions that may imply very different paths and speeds of implementation of the various measures?” • Olivier Lafourcade

19. Operational Implications • Note on Operational Implications: to be prepared with OPCS • AAA: ESW to recognize specificities, binding constraints, institutional endowments, global principles, local implementation • Implementing the new framework for Development Policy Lending OP/BP 8.60: less ideological, more country owned, addressing the challenge of reconciling Bank views with country-views and political economy constraints • Knowledge Bank: Learning is a two way process – the Bank should intermediate knowledge, facilitate transfer of knowledge – less pontification

20. Next Steps • Note on operational implications with OPCS and DEC • Consultations—already started, will continue in the next 2-3 months • Finalize the three publications for next Spring Meetings