A New World Bank Publication: Growth in the 1990s: Learning from a Decade of Reforms

1. A New World Bank Publication: Growth in the 1990s: Learning from a Decade of Reforms Outlined by Ann Harrison (UC Berkeley) Amsterdam, May 2005

2. Presentation Outline • Motivation • Report Structure and Main Results (with an emphasis on Trade Reform) • Main Lessons

3. Motivation: An Extraordinary Eventful Decade • End of communism • End of central planning in India, continuations of reforms in China • End of inflation in Latin America • Macro stabilization, trade openness, privatization, financial sector reform, X-rate liberalization

4. Lessons from the 1990s Motivation: Despite all these reforms, very Uneven Responses: • No set formula of success: China, India, Vietnam, Chile, Indonesia, Botswana • Growth below expectations in AFR & LAC, despite reform (Bolivia, Malawi, El Salvador, Brazil) • Length and depth of recessions in former communist countries, and uneven recovery • Multiple financial crises: Mexico 1994, EAP 1997, Russia & Brazil 1998, Turkey 2001, Argentina 2002

5. Approach: Analysis informed by Experience Three perspectives: • Analytical, (a report) • Policy (lectures by “practitioners”) • Operational (former country directors)

6. The Report (under the general direction of Roberto Zagha) • Growth (two chapters), Policy (four chapters on macro, trade, finance, privatization and deregulation), Institutions (two chapters) and an interpretative chapter • Country and thematic notes: on poverty, on financial crises, growth successes, on development challenges in selected regions, on “resource curse”.

7. Lessons from the 1990s Macro: The More the Better? • Costly episodes of X-rate appreciation (through exchange rate controls, premature liberalization of inflows, aid, debt, natural resources) • Importance of decision making processes, institutions, sound rules (e.g. cyclically adjusted deficits, treatment of public investment, rules on returns on public spending and “value-for-moneyindicators) • Going beyond aggregate indicators (i.e., inflation, fiscal deficits regardless of debt structure or returns on spending)

8. Trade Chapter (my contribution): Motivation • Many countries in the 1990s reformed their trade policies. Although expectations for gains from trade reforms were high, perception of gains mixed (Mexico). • Differences between expectations and outcomes for 1990s illustrative of this whole study • Openness to trade a key aspect of so-called Washington Consensus Policies • 1991 World Development Report: WB Staff responses heterogeneous, but policy recommendations were not. Why?

9. Lesson 1: Openness to trade was a central element of successful growth strategies in the 1990s yet did not deliver the same benefits to all. • Increasing global integration in all dimensions • Developing countries became more integrated (in terms of goods trade) than developed countries • Successful countries were more globalized • But many countries were left behind

10. Developing Countries became more integrated than developed countries (Export Shares of GDP)

11. But not all countries integrated successfully • Forty-three countries had no increase on average in their merchandise exports between 1980 and 2000 • Many countries liberalized tariffs but trade shares did not increase • In addition, many countries failed to live up to expectations of faster growth • Why?

12. Lesson 2 (and explanation one): Trade is an opportunity, not a guarantee Need Complementary Reforms, including (1) Macroeconomic Stability (2) Trade Related Infrastructure and Institutions

13. Lesson 3 (and explanation two): To grow through trade, developing countries need access to industrial country markets • Industrial countries impose higher tariffs on goods exported by developing countries than on goods from other industrial countries. • Labor mobility, another channel for equalizing exchange, also blocked by rich countries • Preservation and expansion of world trade system means striking a better balance between interests of industrial and developing nations

14. Lesson 4: heterogeneity of trade reforms • Many possible paths to open an economy • Report highlights diversity of approaches: Mexico, India, China, Chile • Role for infant industry protection? • Diversity of experiences and need for complementary reforms partly explain difficulty in identifying growth effects of reforms

15. Lesson 5:Distributive effects of trade liberalization are not always pro-poor • Many of the results highlighted in this section draw on my forthcoming book, Globalization and Poverty.Cross-country evidence from my books suggests that: • Trade integration is associated with higher growth, growth is associated with poverty reduction, but there is no evidence of significant link between trade and poverty • Trade and financial integration are associated with rising inequality, higher consumption volatility in poor countries

16. Globalization and Poverty: Lessons from Ten Country Studies (www.nber.org/books/glob-pov) • Simple interpretations of orthodox trade models, suggesting that poor or unskilled would benefit from trade, need to be abandoned. Why? Impediments to labor mobility, need for skilled labor even in labor-intensive sectors, need for complementary inputs. • Poor in expanding (FDI/exporting) sectors gain • Financial crises hurt the poor • Poor in contracting (import-competing) sectors lose—largely a consequence of labor immobility • Complementary policies are critical: trade policy is part of a “package” of successful policies.

17. Unrealistic expectations Trade reforms not a “panacea”: many countries in the 1990s did not experience higher growth following trade reforms. Why? This report focuses on two reasons: Trade reform typically requires complementary reforms (macro-economic policy, infrastructure, other behind the border measures). Industrial country protection: developing country exports (apparel, agricultural goods) are frequently restricted in industrial countries. Common principles, heterogeneous implementation: Many successful trade reforms were pursued through unconventional approaches, some of which involved significant government intervention. Even for trade reform, successful growth strategies are country specific. Trade reforms were not obviously pro-poor nor did they promote unskilled workers, as predicted by Anne Krueger, Bhagwati, and others. Lessons from the 1990s: Challenging the Old Orthodoxy on Trade

18. Financial Liberalization: What Went Right? What Went Wrong? • Macro stability is essential for a sound financial system, not the other way round—weak financial systems exacerbate crises • Benefits from financial liberalization are not self evident yet. They would be greater with better institutions (information, legal and judicial system etc.) • Need better crisis response policies; bad policy responses (Argentina, Indonesia) contributed to the severity of crises • Improving bank soundness requires competition, entry, disclosure and innovation • Banking supervision and regulation are rarely effectively enforced– particularly but not only on state-owned banks. Even “independent” central banks (&/or supervisors) cannot keep governments and connected parties with vested interests in check

19. Privatization and Deregulation • Privatization of firms in competitive markets—unambiguous gains; sometimes counterproductive political consequences • Privatization of utilities—unambiguous gains in operating efficiency, customer service, reliability and access, including the poor … • … but unrealistic expectations regarding private investment in infrastructure…. • … but experiences differ by sectors. Technological improvements vary; and benefits are the greatest in sectors with falling costs (telecom, electric generation) • Need for pricing reform regardless of privatization. Level and structure of prices remain inappropriate in many contexts

20. Privatization and Deregulation • Reducing the scope of regulation can increase competition • Privatization and unbundling makes regulation more important — and technically difficult. Regulatory errors are costlier • Command-and-control regulation especially unsuited to developing countries where regulators often lack technical expertise, information, independence and experience • Greater need for regulation across national/political boundaries because more countries now; and smaller countries face greater difficulty in ensuring competition

21. Public Sector: Can it be Rendered Accountable? • Many reforms: to reduce size, improve effectiveness, modernize budget procedures • Conclusion: It is not only a matter of technical capacity, but of political pressures

22. Democracy: Importance of well functioning basic institutions • Importance of political competition • What matters: informed voters, checks on discretion

23. Lessons from the 1990s Lessons from Development Practitioners • An impressive list of speakers enabling practical perspective to complement analytical findings • Themes from Practitioners’ lectures: • Rigor, no formula, country ownership and specificity: Gaidar, Ahluwalia, Botchwey, Dervis, Blejer, Rima Khalaf • Complexity and Learning by doing: Ahluwalia • Sharing the benefits of growth: Foxley, Cardoso, Aninat • Focus on the binding constraint: Foxley

24. Lessons from the 1990s Lessons from Former CDs • Unrealistic expectations about what reforms could achieve (macro, finance, trade, finance, privatization) • Common principles, heterogeneous implementation: no two successes are alike; policies and institutions perform functions, but function does not determine form. • Country specificity. Successful growth strategies are country specific, no formulae. Successful growth experiences result from strategy, not universal policy packages. Need for selectivity: address binding constraints, in the right sequence, as they emerge • Need to change the mindset: expertise tempered by humility, strengthened by inquisitiveness

25. Lessons from the 1990s Understanding the 1990s • Expectation: Right policies lead to 5-7% growth everywhere • But we learned they don’t... • Is it because? • ...more reforms are needed (Morocco, Argentina, Mexico?) • ...reform takes more time than expected? Recovery is underway already in LAC, AFR, ECA • ...errors were made (capital account, banks with open f/e exposure, appreciation of currency, institutional shortcomings) • ... focus was on correcting government failures, not market failures • ... initial conditions, institutions, policies, external factors differed • Some of these apply, ... but the experience of the 1990s also suggests deeper lessons...

26. Explaining the 1990s: A Deeper Look Five Lessons About Reforms of the 1990s • Reforms focused too much on efficient use of resources, not on expansion of productive capacity • Unrealistic expectations on the long run growth effect of policy improvements • Capital (physical & human) accumulation needed to expand PPF • Emphasis on correcting wrongs, not on expanding what works • Focus was on correcting government failures, not market failures

27. Explaining the 1990s: A Deeper Look 2. Policy Makers underestimated the value of macro economic prudence • Costly episodes of X-rate appreciation (through exchange rate controls, premature liberalization of inflows, aid, debt, natural resources) • Importance of decision making processes, institutions, sound rules (e.g. cyclically adjusted deficits, treatment of public investment, rules on returns on public spending and “value-for-moneyindicators) • Going beyond aggregate indicators (i.e., inflation, fiscal deficits regardless of debt structure or returns on spending)

28. Explaining the 1990s: A Deeper Look Five Lessons About Growth: Reforms of the 1990s 3. Policy Makers mistook sound principles for rigid rules and sought to address any and all constraints, rather than binding constraints • Move away from formulae • Macro stability, market forces, checks on government discretion, openess underly succesful growth experiences. • These sound principles can be implemented in diverse policy and institutional packages.

29. Explaining the 1990s: A Deeper Look 4. Policy makers and economists sought to roll back the government’s role and discretion beyond what was pragmatically feasible. • Centrality of institutions, government discretion, and checks on discretion. • We thought we could roll back the government and substitute rule for discretion (Argentina) Straitjacketing policymakers no substitute for credibility in decision-making (Argentina, but also rigid conditionality frameworks in Africa and elswhere) • Infrastructure: clearest example of unrealistic expectations • Government discretion needs to be checked, not avoided