1. Goodbye Washington Consensus, Hello Washington Confusion?
Economic Growth in the 1990s:
Learning from a Decade of Reform
Veronica Ivanova, EERC 2007
Recent paper December 2006 by a guy from Harvard
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. Secure Property Rights Unified and competitive
Washington Consensus 1990
Deregulation
Secure Property Rights
Fiscal discipline
Openness to FDI
Reorientation of
public expenditures
“Stabilize,
privatize
and
liberalize”
Tax reform
Privatization
Same slogans in Ukraine now
Stabilize, privatize and liberalize – mantra of generation
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 ;
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;
Time passed – things turned out not the way they were supposed to. Washington consensus 1990 inspired a wave of reforms in Latin America, Sub-Saharan Africa, former SU countries which fundamentally transformed the policy landscape in these developing areas. There was more privatization, deregulation and trade liberalization in Latin America and Eastern Europe than probably anywhere else at any point in economic history. In Sub-Saharan Africa governments moved with less conviction and speed, but there too a substantial portion of the new policy agenda was adopted: state marketing boards were dismantled, inflation reduced, trade opened up, and significant amounts of privatization undertaken.

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

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