Growth Strategies
Dani Rodrik
October 2005
There was once a Washington Consensus ….
Original Washington Consensus
“Augmented” Washington Consensus
the previous 10 items, plus:
1. Fiscal discipline
2. Reorientation of public expenditures
3. Tax reform
4. Financial liberalization
5. Unified and competitive exchange
rates
6. Trade liberalization
7. Openness to DFI
8. Privatization
9. Deregulation
10.Secure Property Rights
11. Corporate governance
12. Anti-corruption
13. Flexible labor markets
14. WTO agreements
15. Financial codes and standards
16. “Prudent” capital-account opening
17. Non-intermediate exchange rate regimes
18. Independent central banks/inflation
targeting
19. Social safety nets
20. Targeted poverty reduction
Countries that adopted it …
Structural reform index for Latin American Countries
0.8
0.7
0.6
0.5
0.4
0.3
0.2
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Argentina
Bolivia
Brazil
Chile
Colombia
Costa Rica
Dominican Rep.
Ecuador
El Salvador
Guatemala
Honduras
Jamaica
Mexico
Nicaragua
Peru
Uruguay
Venezuela
Regional average*
… reaped very small benefits:
6%
LAC-7
Emerging Asia
OECD
5%
4%
3%
2%
1%
0%
-1%
1961-1970
1971-1980
1981-1990
1991-2003
Notes: Regional GDP per capita. Asia includes Indonesia, Korea, Malaysia, Philippines and Thailand.
… while those that prospered played by different rules:
World Bank’s “star globalizers”*
Country
Growth rate
in the 1990s
Trade policies in the 1990s
China
7.1
Average tariff rate 31.2%, NTBs; not a WTO
member
Vietnam
5.6
Tariffs range between 30-50%, NTBs and state
trading, not a WTO member
India
3.3
Tariffs average 50.5% (the highest but one in
the world)
*According to World Bank, Globalization, Growth, and Poverty, 2001, p. 6.
Hence the WC is fast being replaced by a new
emergent consensus:
• Economists have limited ability to recommend
appropriate growth policies
• It’s not policies, but institutions that matter
• Appropriate policies (and institutions?) depend on local
circumstances
• Experimentation is inevitable
The changing conventional wisdom:
“there is no unique universal set of rules… we need to
get away from formulae and the search for elusive “best
practices” …. rely on deeper economic analysis to
identify the binding constraints on growth…”
From the introduction by Gobind Nankani to the World
Bank’s Economic Growth in the 1990s: Learning from a
Decade of Reform
“whatever the policy area, there is no single formula
applicable to all circumstances; policies’ effectiveness
depends on the manner in which they are discussed,
approved, and implemented…. A strictly technocratic
approach toward policymaking shortchanges these steps
….”
From the introduction to the forthcoming IPES Report of the
IDB.
But some change less than others…
“reforms were uneven and remained incomplete…. More
progress was made with measures that had low up-front
costs, such as privatization, relative to reforms that
promised greater long-term benefits, such as improving
macroeconomic and labor market institutions, and
strengthening legal and judicial systems”
-- IMF (2005)
“Meant Well, Tried Little, Failed Much”
-- Anne Krueger (2004)
All agree on the need to:
• replace “quick fixes” with “deep fixes”
• use different strokes for different folks
Towards a more operational agenda:
Designing growth strategies
•
Growth diagnostics: what are the most binding
constraints on growth?
•
Policy design: how do we best alleviate the relevant
constraints?
•
Institutionalization: how do we institutionalize the
diagnostic/policy design process in view of the fact
that the nature of binding constraints will change
over time?
Step 1: Growth diagnostics
Problem: Low levels of private investment and entrepreneurship
Low return to economic activity
Low social returns
High cost of finance
bad international
finance
Low appropriability
government
failures
poor
geography
low
human
capital
bad infrastructure
micro risks:
property rights,
corruption,
taxes
bad local finance
market
failures
information
externalities:
“self-discovery”
macro risks:
financial,
monetary, fiscal
instability
coordination
externalities
low
domestic
saving
poor
intermediation
Illustrations
• El Salvador: low investment demand due to low incentives for
“self-discovery”
– Need to find new high-return investment opportunities
– Solution: industrial policy?
– What will not work: Improving “institutional environment” will
not be very effective when constraint is low appropriability
due to “cost discovery” and coordination externalities
• Brazil: low investment due to high cost of capital
– Need to increase domestic savings and enhance access to
foreign savings
– Solution: adjust fiscal policy?
– What will not work: improving “business climate” not very
effective when problem does not lie with low investment
demand
The growth diagnostics approach is based on the
view that small changes, if appropriately
targeted, can unleash growth
• Growth accelerations are frequent
– More than 80 cases since the mid-1980s
– Including in SSA
• And they are rarely triggered by comprehensive economic
reforms
– Key is well-targeted effort to remove most severely binding
constraints
– China in 1978; India in 1980; Chile in 1984-85
Step 2: Policy design
• First-best logic: target policy on relevant distortion
– but hardly works due to second-best interactions and
political-economy/administrative constraints
• Multiplicity of institutional solutions
– the functions that good institutional arrangements perform
(protect property rights, ensure macro stability, internalize
externalities, etc.) do not map into unique institutional forms
– local contingencies require local solutions
• TVEs versus privatization as property reform
• Experimentation and learning are necessary components of
reform
• Implication for government-business relations
– government needs to be close enough to business to elicit
information, far enough not to be captured
… hardly the Washington Consensus!
Chinese shortcuts
• Two-track pricing insulates public finance from the
provision of supply incentives
• Household responsibility system and township and
village enterprises obviate the need for ownership
reforms
• Special economic zones provide export incentives
without removing protection for state firms
• Federalism, “Chinese-style” generates incentives for
policy competition and institutional innovation
East Asian anomalies
Standard ideal
“East Asian” pattern
Property rights
Private, enforced by the rule of law
Private, but govt authority occasionally
overrides the law (esp. in Korea).
Corporate governance
Shareholder (“outsider”) control,
protection of shareholder rights
Insider control
Business-government relations
Arms’ length, rule based
Close interactions
Industrial organization
Decentralized, competitive markets,
with tough anti-trust enforcement
Horizontal and vertical integration in
production (chaebol); governmentmandated “cartels”
Financial system
Deregulated, securities based, with free
entry. Prudential supervision through
regulatory oversight.
Bank based, restricted entry, heavily
controlled by government, directed
lending, weak formal regulation.
Labor markets
Decentralized, de-institutionalized,
“flexible” labor markets
Lifetime employment in core
enterprises (Japan)
International capital flows
“prudently” free
Restricted (until the 1990s)
Public ownership
None in productive sectors
Plenty in upstream industries.
Institutional domain
Step 3: Institutionalizing the diagnostic process
• Nature of binding constraints change over time
• Growth will slow down if diagnostic process not ongoing
– Dominican Republic, Indonesia, Cote d’Ivoire,..
– China’s future challenges
• Sustaining growth requires ongoing institutional reform to
– Maintain productive dynamism
– Increase resilience of economy to external shocks
Why none of this is “heterodox”
• Approach outlined above is based on empirical evidence and
standard economic theory
– Policy recommendations in economics are always statecontingent
• policy A is desirable if …
– This is how economists think in the seminar room
• Approaches based on “rules of thumb” are not
– Washington Consensus and later variants are based on
implicit theorizing about market structure, political economy,
institutional capacity
Some implications
• Successful growth strategies require policy experimentation
– willingness to try unconventional solutions
• Successful growth strategies result in higher trade and
investment flows
• Implications for WTO, WB, IMF:
– de-emphasize “best practice” approach
– policy space
– selective approach instead of laundry list