Institutions and growth

Joanna Tyrowicz Institutions and growth Institutional Economics How to get to the long run?  Two basic building block of a growth strategy: An i...
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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?



Corruption: “grand” or “petty’?



Legal reform: import or evolve?



Public health: cheap medicines or TRIPs?



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

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