Joanna Tyrowicz
Institutions and growth
Institutional Economics
How to get to the long run?
Two basic building block of a growth strategy: An investment strategy An institution-building strategy => THIS IS NOT NEW STUFF, WE KNEW IT ALL THE WAY
But examples of successful investment strategies:
Import substituting industrialisation (Brazil, Mexico, Turkey) Outward orientation (South Korea, Taiwan) Two track reforms (China, Mauritius)…
2
The logic of Washington Consensus problem
solution
Low agricultural productivity
Price liberalization
Private incentives
Land privatization
Fiscal revenues
Tax reform
Urban wages
Corporatization
Monopoly
Trade liberalization
Enterprise restructuring Unemployment
Financial sector reform Safety nets And so on...
3
Disappointments of the Washington Consensus
Latin America: Only 3 countries have grown faster during the 1990s than in the 1950-80 period (and one of those 3 was Argentina!)
Countries in transition: Real output below 1990 levels in all but four former socialist economies; poverty rates higher
Sub-Saharan Africa: Results remain very disappointing, and far worse than those obtained prior to the late 1970s
Widening income gaps:
Frequent and painful financial crises: East Asia, Brazil, Russia, Argentina, Turkey. 4
Washington Consensus revival 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 5
Deception of Washington Consensus
1971-1980
1981-1990
1991-2000
Latin America & Caribbean
2.78%
0.97%
2.07%
East Asia & Pacific
1.07%
0.86%
1.66%
Middle East & North Africa
1.21%
0.69%
0.28%
South Asia
0.09%
0.79%
0.85%
Source: Calculated from World Development Indicators 2002
6
Deception of Washington Consensus
7
Many possible institutional forms… OBJECTIVE
UNIVERSAL PRINCIPLES
Property rights: Ensure Productive efficiency potential and current (static and dynamic) investors can retain the returns to their investments
INSTITUTIONAL ARRANGEMENTS What type of property rights? Private, public, cooperative? What type of legal regime? Common law? Civil law? Adopt or innovate?
Incentives: Align producer incentives with social costs and benefits.
What is the right balance between decentralized market competition and public intervention?
Rule of law: Provide a transparent, stable and predictable set of rules.
Which types of financial institutions/corporate governance are most appropriate for mobilizing domestic savings? Is there a public role to stimulate technology absorption and generation? (e.g. IPR “protection”)
8
Many possible forms … cont’d OBJECTIVE
UNIVERSAL PRINCIPLES
Macroeconomic Sound money: Do not and Financial generate liquidity beyond Stability the increase in nominal money demand at reasonable inflation. Fiscal sustainability: Ensure public debt remains “reasonable” and stable in relation to national aggregates. Prudential regulation: Prevent financial system from taking excessive risk.
INSTITUTIONAL ARRANGEMENTS How independent should the central bank be? What is the appropriate exchange-rate regime? (dollarization, currency board, adjustable peg, controlled float, pure float) Should fiscal policy be rule-bound, and if so what are the appropriate rules? Size of the public economy. What is the appropriate regulatory apparatus for the financial system? What is the appropriate regulatory treatment of capital account transactions?
9
Many possible forms … cont’d OBJECTIVE:
UNIVERSAL PRINCIPLES:
INSTITUTIONAL ARRANGEMENTS How progressive should the tax system be?
Distributive justice and poverty alleviation
Targeting: Redistributive programs should be targeted as closely as possible to the intended beneficiaries. Incentive compatibility: Redistributive programs should minimize incentive distortions.
Should pension systems be public or private? What are the appropriate points of intervention: educational system? access to health? access to credit? labor markets? tax system? What is the role of “social funds”? Redistribution of endowments? (land reform, endowments-at-birth) Organization of labor markets: decentralized or institutionalized? Modes of service delivery: NGOs, participatory arrangements., etc.
10
Chinese shortcuts
Household responsibility system and township and village enterprises obviate the need for ownership reforms
Two-track pricing insulates public finance from the provision of supply incentives
Federalism, “Chinese-style” generates incentives for policy competition and institutional innovation
11
Questions
Are there „sole right solutions”? Which?
How can we say if an „old” solution is still a good one?
What does the policy reform serve: more growth or acceptance/adaptation?
What are then „deep determinants” of income levels?
Policy implications: „one way” versus „many ways”
Balance between institutional convergence and diversity?
12
All of development economics … on one page ☺ income
endogenous
endowments
partly endogenous
exogenous
productivity
trade
geography
institutions
Central question of development economics: which are the most important arrows and why? 13
Geographical determinists claim that… income
endowments
productivity 4
1, 2
trade
institutions 1: natural resources; soil quality
3
geography
2: public health 3: colonialism, wars, migrations 4: resource curse
14
… trade fundamentalists claim that … income
endowments
productivity
trade
geography
institutions
Integration ⇔ convergence 15
…. While the institutionalists prefer income
endowments
productivity
trade
institutions
One kind versus many?
geography
Where do they come from? 16
Determinants of wealth log yi = µ + α INSi + β INTi + γ GEOi + ε i
(1)
INSi = φ + λ INTi + ψ GEOi + v INSi
(2)
INTi = ϕ + θ INSi + ω GEOi + v INTi
(3)
17
Some seminal work
Frankel and Romer (1999) Hall and Jones (1999) Acemoglu, Johnson, Robinson (2001) Dollar and Kraay (2002) Alcala and Ciccone (2002) Easterly and Levine (2002)
18
Good instrument versus good theory… Mortality rates of early European settlers as an instrument for institutional quality: the AJR theory settler mortality between 17th and 19th century
settlements type of early institutions current institutions current performance
19
Basic implementations into empirics theoretical concept
empirical proxy
instrument
geography
distance from equator, mean temperature, etc.
--
integration
trade/GDP ratio
institutional quality
predicted trade share constructed from a bilateral gravity equation (Frankel and Romer, 1999) survey of investor mortality rates perceptions among 19th century regarding protection European settlers of property rights, (Acemoglu et al., rule of law, etc. 2001) 20
Instruments and theories… 10
USA NZL
expropriation risk, 1985-95
AUS
CAN SGP
IND
HKG MYS
GMB BRA CHL MEXBHS TTO COL VEN MAR CRI URY PRY EGY ECU DZA TUN ARG
MLT ZAF
PAK GUY MMR ETH
LKA PER BOL
GAB IDN PNG JAM
CIV TGO
VNM DOM KEN SEN PAN
TZA CMR
GIN GHA SLE NGA
HND GTM BGD SLV
NIC
AGO NER
SUR
GNB
COG BFA UGA
SDN
MDG MLI
HTI ZAR
3.5
7.98617
2.14593 Log settler mortality
21
Instruments and theories … cont’d SGP USA HKG CAN
10.2414 AUS NZL
BHS BRB
MLT MUS MYS ZAF
lcgdp95
FJI
GUY DJI MMR PAK IND SUR
ARG URYTTO CHL MEX BRA VEN COL TUN PRY CRI SLV PER DZA GTM EGY ECU MAR LKA
GAB BLZ PAN JAM DOM PNG IDN GIN
BOL HND BGD SDN
NIC HTI VNM LAO SEN KEN GNB
ETH
CMR
CIV
COG MRT GHA AGO CAF BEN BFA TCD SLE UGA NER MDGTGO RWA BDI
GMB MLI NGA
TZA
ZAR
5.77144 2.14593
7.98617 Log settler mortality
22
Bottom line results Table 2: Determinants of Development: Core Specifications AJR sample
Dependent variable
log GDP per capita 1995
log GDP per capita 1995
(1)
(2)
Geography (DISTEQ)
0.74 (4.48)
*
Institutions ( RULE)
Extended AJR sample
log GDP per capita 1995 (3)
log GDP per capita 1995
log GDP per capita 1995
(4)
(5)
0.20
0.32
0.81
(1.34)
(1.85) **
(5.35)
0.78 (7.56)
*
Integration (LCOPEN)
log GDP per capita 1995
log GDP per capita 1995
log GDP per capita 1995
log GDP per capita 1995
(6) (7) Panel A. Ordinary least squares
(8)
(9)
0.21
0.24
0.82
(2.75) *
(2.9)
(5.71)
0.25 *
(1.85)
Extended AJR sample
Large sample
0.36 (2.37)
***
0.69
0.79
0.70
(6.07) *
(8.96) *
(6.86)
0.76 **
(10.59) *
0.80 *
RULE (10)
LCOPEN (11)
-0.72 *
0.77
(12.41) *
(-3.47) *
0.57
(10.71) *
(4.14) *
0.16
0.15
0.08
0.34
(1.48)
(1.61)
(1.31)
(3.37)
*
Panel B. Two-stage least squares Geography (DISTEQ)
0.74
-0.42
-0.56
0.81
-0.44
-0.70
0.76
-0.05
-0.14
0.78
-0.86
(4.48) *
(-1.19)
(-1.23)
(5.35) *
(-1.22)
(-1.34)
(10.59) *
(-0.4)
(-0.91)
(5.64) *
(-3.09) *
Institutions ( RULE)
1.67
1.78
(4.29) *
(3.78) *
Integration (LCOPEN) No. of observations 64 64 R-square 0.25 0.54 Test for over-identifying restrictions (p-value) Dependent variable Geography (DISTEQ)
RULE 0.41 (2.8) *
Settler mortality (LOGEM4)
-0.39 (-3.87) *
Population speaking English (ENGFRAC) Population speaking other European langages (EURFRAC) Constructed openness (LOGFRANKROM) F-statistic n.a. R-square
1.76 (4.4) *
2.00
1.19
1.32
0.77
(3.55) *
(7.91) *
(6.77) *
(2.33) **
-0.18
-0.302
-0.17
0.23
(-1.23)
(-1.07)
(-1.35)
(2.04) **
64 0.562
RULE
80 0.264
80 0.51
80 0.52
140 0.417
140 140 80 0.50 0.55 0.54 (0.0071) (0.0365) Panel C: First Stage for Endogenous Variables (Institutions (RULE) and Integration (LCOPEN)) LCOPEN RULE RULE LCOPEN RULE RULE LCOPEN LCOPEN
80 0.38
RULE
0.47
-0.25
0.46
0.53
-0.19
0.65
0.64
-0.04
0.01
0.46
(3.21) *
(-1.99) ***
(3.25) *
(3.76) *
(-1.42)
(10.35) *
(10.92) *
(-0.75)
(0.09)
(3.25) *
-0.27
-0.40 (-4.1) *
0.20 (1.95) **
-0.30
-0.34
-0.34
(-3.49) *
(-3.63) *
(-3.75) *
0.90 (10.28) *
22.9
17.2
41.7
0.41
0.44
0.66
n.a.
-0.28
(-3.2) *
(-3.63) *
0.19
0.18
0.17
(2.69) *
(2.69) *
(2.66) *
0.12
0.16
-0.11
(1.74) ***
(2.43) **
(-1.65)
0.19
0.80
0.25
0.70
0.80
(2.16) **
(9.68) *
(4.37) *
(12.4) *
(9.10) *
23.3
17.8
37.2
0.36
0.39
0.58
n.a.
46.3
44
42
45.0
23.3
0.49
0.55
0.54
0.53
0.36
23
Distance from Equator
Figure 4: “Real Openness,” Openness, and Income (Difference between logs of “real openness” and openness on the vertical axis and log per capita PPP GDP on the horizontal axis)
24
Predicted (fitted) distance measure Residuals
e( lcgdp95 | X,disteq ) + b*disteq
2.65895
Linear prediction
SGP
HKG
MYS GAB SYC
THA
JPN
KWT OMN TWN QAT SAU
ITA ISR KOR BHR COL BRA MUS CYP USA ZAF MEX LKA PNG VEN GRC ECU FJI PER LUX PRY NLD DNK NOR AUS PHL MLT ESP ARG SWE PAN BWA CHE CAN CZE CRI GIN BEL FIN CMR NAM FRA CHL PRT CIV BHS SWZ IRN TUR BRB GTM ZWE DEU KEN BOL TTO EGY STP AUT SLVMMR HUN TUN CUB NZL RUS URY COG SURAGO DZA BGR GHA CPV MAR LBN IND DJI CAF CHN COM DOM UGA POL JOR SYR ROM GNQ KHM NICSEN SDN HTI VNM RWA BEN BLZ GBR BGD VCT LAO LSO PAK BDI GUY NGATCD BFA IRL HND MRT SLE MLI NER TGO GMB ZMB JAM ALB NPL YEM GNB TZA ETH MWI MDG MOZ ZAR IDN
ISL
MNG
-1.75562 0
Distance from Equator
(f)
64
25
Opennes Log Real GDP per capita in 1995 10.4544
Linear prediction LUX
USA
Log Real GDP per capita in 1995
CHE KWT JPN CAN SWE DNKNOR AUS NLDBEL ISL DEU AUT QAT FRA ITA FIN GBR NZL IRL BHS CYP ISROMN ESP CZE BRB KOR PRT TWN GRC SAU MUS ARG SYC HUN URY CHL MYS TTO GAB MEX POL THAZAF RUS BGR BRA VEN TUR BLZ COL PAN TUN BWA PRY CRI LBNFJI CUB IRN ROM SLV NAM PER JOR DZA GTM JAM CPV SYR DOM EGY ECU PNG IDN MAR ALBLKA PHL GUY CHN GINBOL ZWE DJI NIC HND LSO MMR IND COM CIV PAK CMR HTI VNM SUR LAO BGD COG SEN MRTMNG GHA NPL AGO KHM GNQ KEN SDN GMB BENCAF BFA SLE TCD MOZ GNB YEM TGO MLI RWA UGA ZMB NER BDI MDG NGA MWI ETH TZA
HKG
SGP
BHR MLT
SWZ
ZAR
5.77144 2.55341
Log Openness
5.77982
(e) 26
Predicted (fitted) Opennes e( lcgdp95 | X,LogOpenHat ) + b*LogOpenHat
Residuals
Linear prediction SGP
1.35991 JPN
IDN
BRA
CHN
MYS THA
HKG GAB
TWN SAU
OMNKWT QAT SYC ITA COL MEX USA VEN ZAFPNG KOR ECU PER LKA ISR MUS BHR FJI CYP PHL PRY AUS ARG GRC ESP CAN PAN CRI DNK BWA NOR CHL SWE CMR GIN NLD CHE CIV CZE NAM TUR FRA BOL IRN ZWE MLT KEN FIN GTM BEL EGY PRT RUS CUBMMR IND DEU SLV BHS SWZ AGO TTO NZL URY BRB COG TUN ISL STP AUT CAF GHA DZA HUN SUR MAR UGA CPV DOM BGR VNMSDN POL COMLBN DJI KHM SEN NIC ROM HTI BGD RWA SYR NGA JOR GNQ TCDBFA PAK LAO BEN BDI MLI GBR LSO HND NER MRT GUY SLE BLZ ETH ZMB MDG VCT TZA TGO NPL IRL GMB YEM MWI JAM GNB MOZ ALB ZAR
LUX
MNG
-2.99292 2.919
Predicted Log Openness
5.37554
(e) 27
Rule of Law Log Real GDP per capita in 1995
LUX
Log Real GDP per capita in 1995
10.4544
HTI AGO GNB
5.77144
Linear prediction
USA SGP HKG CHE NOR DNK KWT BEL JPN CAN AUS NLD SWE ISL DEU QAT AUT FRA ITA GBR FIN IRL NZL BHS CYP OMN ISR ESP TWN CZE BHRKOR MLT PRT BRB GRC SAU MUS ARG SYC HUN CHL MYS TTO URY GAB MEXBRA ZAF POL RUS THA BGR VEN TUR BLZ PAN COL FJI TUN BWA PRY CRI LBN SWZ IRN CUB ROM SLVPER NAM JOR DZA GTM JAM CPV SYR DOM EGY MAR PNG IDNECU ALB PHL LKA GUY GIN BOL CHN ZWE DJI NIC HND LSO MMR PAK COM IND CIV CMR VNM SUR LAO BGD COG MRT KHM SEN GHA NPL MNG GNQSDN KEN GMB CAF BEN BFA TCD MOZ SLE TGOMDG UGA MLI RWA NER ZMB YEM BDI NGA MWI ETH TZA
ZAR
-2.08859
Rule of Law
1.90945
(d) 28
Predicted (fitted) Rule of Law Residuals
Linear prediction LUX
2.42011 e( lcgdp95 | X,RuleLawHat ) + b*RuleLawHat
SGP HKG
KWT QAT
CHE DNK NOR BEL USA NLD AUT BHS ISL SWE JPN AUSCAN ITA ISR CYP OMN FRA DEU BRB FIN BHR MLT NZL TWN SYC ESP CZEPRT KOR GRC MUS SAU TTO VCT MYS GAB HUN BLZ URY ARG CHL BGR SWZ THA ZAF PAN LBN POL VEN MEX CRI BWA TUR TUN JOR BRA FJI COL PRY SLV RUS ROM NAM CPV IRN CUB JAM SYR GTM PER DZA DOM ECU ALB PNG EGY GUY LKA MAR IDN DJI PHL GIN STP ZWE BOL COM NIC HND LSO CIV MMR CHNHTI CMR SUR GNQ LAOPAK COG SEN MRTGMB VNM GHA IND KHM BGD BEN KEN AGO NPL SDN CAF MNG SLE TGO GNB RWA BFA TCD UGA BDI MLI YEM MOZ NERZMB MDG NGA MWI
GBRIRL
ETH TZA
-2.59633
ZAR
-1.18734
Predicted Rule of Law
1.92975
(d) 29
Instruments and theories … cont’d
Log Real GDP per capita in 1995
10.3875
5.83834 0
1 colonized by Europeans
30
Decomposition of wealth… Table 4. Determinants of Development: Robustness to "Influential" Observations, Neoeuropes, Legal Systems, Origin of Colonizer, and Religion Baseline 1
(1)*
(1)**
(1)***
(1)****
Baseline 2
(2)*
(2)**
(2)***
(3)
(4)
(5)
Two-stage least squares: Dependent variable is log GDP per capita in 1995 Geography (DISTEQ)
Institutions (RULE)
Integration (LCOPEN)
-0.70
-1.34
-0.66
-0.90
-0.58
-0.14
-0.14
0.02
-0.36
-0.96
(-1.34)
(-1.08)
(-1.38)
(-1.14)
(-0.81)
(-0.91)
(-0.91)
(0.17)
(-2.12) **
(-1.45)
2.00
2.68
1.82
2.82
1.97
1.32
1.32
0.90
1.69
2.43
(3.55) *
(3.03) *
(3.31) *
(2.43) **
(1.67) ***
(6.77) *
(6.77) *
(8.47) *
(4.87) *
(3.09) *
-0.302
-0.44
-0.31
-0.75
-0.42
-0.17
-0.17
0.03
-0.36
-0.41
(-1.07)
(-1.68)
(-1.23)
(-1.30)
(-0.81)
(-1.35)
(-1.35)
(0.25)
(-1.46)
(-1.50)
REGIONAL DUMMIES Latin America (LAAM) Sub-Saharan Africa (SAFRICA) East Asia (ASIAE)
0.44
0.17
(1.25)
(0.33)
-0.67
-0.81
(-0.98)
(-1.27)
2.22 (2.56)
2.13 *
-0.23 (-0.79)
(2.97)
*
-0.32 (-1.12)
0.25 (1.655) ***
-0.19
-0.43
-0.63
(-0.51)
(-1.11)
(-3.79) *
0.24
0.07
0.12
(0.56)
(0.14)
(0.62)
Legal origin
[0.133]
Identity of colonizer
[0.058] ***
Religion
[0.019] **
R-square No. of observations
0.52 80
Omitted observations
None
0.56 78 Singapore Ethiopia
0.65 79 Ethiopia
0.44 76 Australia Canada New Zealand USA
0.63 76 Australia Canada New Zealand USA
0.55 140
0.55 140
None
None
0.67 137
0.55 136
Cuba Australia Czech Rep. Canada Germany New Zealand USA
0.53 80
0.56 80
0.59 80
None
None
None
31
Political trillemma of the modern world Deep economic integration Global Federalism
Golden Straitjacket
Democratic politics
Nation state
Bretton Woods compromise
Pick two, any two: cannot have deep integration, nation state and democracy simultaneously
32
Testing in practice ☺ 1.
Transitions to high economic growth are typically sparked by a relatively narrow range of policy changes and institutional reforms South Korea and Taiwan since early 1960s, Mauritius since early 1970s Brazil, Mexico, Turkey others before 1980, China since 1978 India since the early 1980s, Chile since mid-1980s ACTUALLY: REFORM IS SUBSEQUENT TO GROWTH EPISODES IMPULSE
2. The policy changes that initiate these growth transitions typically combine elements of orthodoxy with unconventional institutional innovations Outward orientation combined with industrial policies in East Asia; Partial liberalization combined with household responsibility system EPZ in Mauritius Capital controls in Chile 33
But innovations do not travel too well EPZs work in Mauritius, but not in most other countries (Kenya, Wietnam, Brazil) Gradualism works well in India but not in Ukraine HRS works in China, but not in Russia ISI works in Brazil but not Argentina MAYBE THERE IS SOMETHING SPECIFIC ABOUT „APPROPRIATE” POLICIES? NOT: economic principles work differently in different places Most first-order economic principles come institution-free (incentives, competition, hard-budget constraints, sound money, fiscal sustainability, property rights, etc.) But these principles do not map directly into institutional solutions.
34
Let’s do a small formal model ☺
Why countries do converge on “consensus” policies even when their circumstances call for different arrangements.
Some countries choose to “experiment” rather than imitate, why?
Plausible pattern of economic performance when a tendency for countries to converge on policies.
Key dilemma faced by policy makers:
the choice of imitating the leader country (and ignoring their private signal) following their signal (and being perceived as a "corrupt" government, being denied IFI assistance, etc.)
35
A toy model ☺ 1. countries differ in their underlying characteristics (“state”); 2. these characteristics are unknown to the public; 3. policy makers receive a signal about the underlying state, but have no way of costlessly communicating it to their electorate; 4. when another country (the "leader") stumbles on a policy that works, both the policy and the outcome is observable to all; 5. policy makers in the "follower" country bear a (private) cost if they pursue a policy that differs from one that worked in the "leader" country.
36
Toy model solution yi-output
ai-policy zi-country type,
yi = -θ(ai - zi)2
Country A goes first, chooses policy aA with outcome yA. Country B, the follower. Assume yB is initially low compared to yA. aA and yA are both observed by the public in B. Government in B observes the country's ideal type, zB. Determine B's ideal policy, up to a random error term: a'B = zB + ε, with ε - N (0, σ). Government has to choose aB, either aA or a'B. If aB does not equal aA, the government pays a fixed cost K (this is a private cost to policy makers, and not a social cost). Distinguish between output, yB, and government's utility function uB, with uB = yB - K. yB = -θ(aA - zB)2 if aB = aA uB = yB - K = -θ(a'B - zB)2 - K if aB = a'B
E(uB)
= -θ(aA - zB)2 = -θσ2 - K
if aB = aA if aB = a'B
Mimic the leader as long as zB is in the interval: [aA - (σ2 + K/θ)1/2, aA + (σ2 + K/θ)1/2]. Therefore E(y) equals -θ( aA - zB)2 if aB = aA, and -θσ2 otherwise.
37
Toy model solution
C
B
A Neighbors
Periphery `Far' 'Near'
Expected National Income
Income of `Leader’
0
zh*
zeff
zc*
z1=1=a1
Follower government’s type
38
Toy model conclusions 1. Growth pole, around the successful leading country, A 2. Countries in the "near periphery" are strictly worse off (compared to a situation where country A did not exist). Close enough that forced to mimic, but too far to benefit. 3. Countries in the "far periphery" are intermediate in terms of average performance, but also exhibit much greater variance in performance. 4. Similar growth poles are likely to develop sometime down the line in the far periphery--but not in the center or the near periphery. 39
40
Growth and distance from Brussels
41
Growth and distance from Brussels growth since onset of reform .03399
Fitted values
POL SVN HRV
CZE
HUN SVK
ALB EST MKD
MNG
BLR BGR UZB LVA LTU
KAZ
ARM
ROM RUS
KGZ
TKM GEO UKR MDA
-.10982
AZE
448
TJK
4225 distance from Brussels (miles)
42
Growth and distance from Brussels
43
„Reform” and distance from Brussels
44
Voice and accountability and distance from Brussels
45
Control of corruption and distance from Brussels
46
Early conclusions 1. Markets require non-market institutions to work well 2. The institutional basis of market economies is not unique 3. Institutional diversity creates transaction costs and hampers full economic integration 4. Neither feasible nor desirable to eliminate these costs, cannot target total integration „Thin” versus „thick” models of globalization 5. Within the range of “thin” considerable choice of models. Each one of these privileges different groups….
47
Markets require non-market institutions to work well a. Markets are not self-creating i. Property rights ii. Contract enforcement b. Markets are not self-regulating i. Regulatory authorities ii. Correction of market and coordination failures c. Markets are not self-stabilizing i. Monetary, fiscal and currency arrangements d. Markets are not self-legitimating i. Political democracy ii. Social insurance iii. Redistribution
48
The institutional basis for market economies is not unique a. Economic principles versus their institutional embodiment b. Institutional diversity grounded in: 1. Differences in social preferences (over equity versus opportunity, for example) 2. Hysteresis and path dependence due to institutional clusters and complementarities (US versus Japan versus various European models) 3. Context specificity of desirable institutional arrangements to promote economic development (China, India, Latin American examples)
49
Institutional diversity as a source of transaction costs blocking deep integration a. Despite disappearance of border barriers, border effects remain strong 1. Missing trade 2. Small net capital flows b. Institutional diversity is an important source of market segmentation c. Trade: the role of regulatory & jurisdictional discontinuities, and problems of standards and contract enforcement. d. Capital flows: the problem of “sovereign” risk e. “Deep integration” agenda as a response - but is it wise?
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There is just about 64 standards…. Key Standards According to the Financial Stability Forum Subject Area
Macroeconomic Policy and Data Transparency M onetary and financial policy transparency Fiscal policy transparency Data dissem ination Institutional and Market Infrastructure Insolvency Corporate governance Accounting Auditing Paym ent and settlem ent M arket integrity
K ey Standard
Issuing Body
Code of G ood Practices on Transparency in M onetary and Financial Policies Code of G ood Practices in Fiscal Transparency Special Data Dissemination Standard/ G eneral Data Dissem ination System
IM F
Principles of Corporate G overnance 3 International Accounting Standards (IAS) International Standards on Auditing (ISA) Core Principles for Systemically Im portant Payment Systems The Forty Recom mendations of the Financial Action Task Force
Financial Regulation and Supervision Banking supervision Core Principles for Effective Banking Supervision Securities regulation O bjectives and Principles of Securities Regulation Insurance supervision Insurance Supervisory Principles
Source: FSF
IM F IM F
W orld Bank OECD IASC IFAC CPSS FATF
BCBS IOSCO IAIS
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… and even if you comply…
South Korea Peru
annual reserves social cost foreign in "excess" of excess reserves months reserves reserves (% of (% of (mil $, of 2000:I) imports GDP) GDP)* 83,581 7.0 0.12 0.70 9,041 12.2 0.12 0.72
* Assuming a 6% spread between the yield on foreign reserves and the marginal cost of public borrowing.
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… some costs…
Institution-building via integration: has opportunity costs, when human resources, administrative capabilities, and political capital are limited;
does not necessarily yield appropriate institutions nor necessarily an appropriate sequencing thereof;
presumes imported blueprints can be made effective
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Some illustrative trade-offs •
Education: bank auditors or teachers?
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Corruption: “grand” or “petty’?
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Legal reform: import or evolve?
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Public health: cheap medicines or TRIPs?
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Industrial strategy: South Korea of 60s/70s or Argentina of the 90s?
•
Labor relations: encourage centralized bargaining or deinstitutionalize labor markets?
•
Social protection: use fiscal resources for social programs or for building war chests against financial crises?
•
Exchange rate regimes: avoid corners or manage the ER for growth? 54