1. 1 Policies, institutions and convergence - discussion Jorgen Elmeskov, OECD Economics Department

2. 2 Three simple points Convergence depends on structural policy settings (as well as on macro) The structural policy settings consistent with convergence keep changing Hence, the ability to adapt structural policy settings may determine whether countries converge –> Need to consider political economy factors

3. 3 Convergence depends on structural policy settings OECD growth study and related empirical research has provided evidence

4. 4 The structural policy settings consistent with convergence keep changing As countries catch up, different structural policies may be required –E.g. IPR protection may be more important closer to the technological frontier As the external environment changes, structural policy settings may also have to change –E.g. entry barriers as a result of product market regulation may be more of a drag when technology is in flux; likewise for job protection Structural policies may have to change as our understanding of optimal policy design develops –E.g. understanding that some segments of network sectors are competitive

5. 5 The ability to adapt structural policy settings may determine convergence Structural reforms tend to destroy rent and are therefore resisted Many factors affect the ability to reform. Most are difficult to predict long in advance as needed for convergence scenarios (e.g. economic crisis, fiscal situation, spillovers between reforms) Other factors may be more slow-moving but our understanding is too limited to take them into account in convergence scenarios (e.g. political institutions, integrity of institutions, factors underlying consensus)

6. 6 Conclusion The political economy influences on convergence are difficult to make operational in scenarios But that does not prevent them from being important, e.g. –full catch-up of Europe and Japan to the US was widely expected in the 60s but things turned out differently –the imminent slowdown of the Celtic Tiger has been predicted for as long as anybody can remember