Macroeconomic Factors and Growth: Theory and Case Studies Lecture 2: The Struggle for a

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Macroeconomic Factors and Growth Theory and Case
Studies Lecture 2 The Struggle for a
Post-Washington Consensus

• Bernhard Seidel

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Structure

• Lecture 1 The Washington Consensus (Fritsche)
• Lecture 2 The Struggle for a Post-Washington
  Consensus (Seidel)
• Lecture 3 Case studies
• Basic aim of this lecture New approach of
  development policies based on the experiences
  with crises and critiques

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Main Sources

• Gore, Charles (2000), The Rise and Fall of the
  Washington Consensus as Paradigm for Developing
  Countries. In World Development 28, 5, pp.
  789-804.
• Stiglitz, Joseph E. (1998), Towards a New
  Paradigm for Development. United Nations
  Conference on Trade and Development. 9th Raul
  Prebisch Lecture, delivered at the Palais des
  Nations, Geneva, 19 October 1998.
• Williamson, John (2003), An Agenda for Restarting
  Growth and Reform. In Pedro-Pablo Kuczynski and
  John Williamson (eds.), After the Washington
  Consensus Restarting Growth and Reform in Latin
  America

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The Main Elements of the Washington
ConsensusFrom state-led dirigisme to
market-oriented policies

• Macroeconomic stability
• Controlling inflation
• Reducing of fiscal deficits
• Opening economies
• Trade liberalization
• Capital account liberalization
• Liberalization of domestic product and factor
  markets
• Deregulation
• Privatization

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Critical Aspects

• Shift from historical analysis to ahistorical
  performance
• Traditional attempt to understand pattern and
  laws of development
• Post-modernization improving and monitoring
  performance indicators
• Neglect of sustainable human development What
  are the means and the objectives?
• Discussion of key objective of development
  policies Poverty reduction by improving peoples
  lives, participation and more equal partnership
  versus priority for growth and macroeconomic
  stabilization
• Internal factors, domestic policies and global
  shocks
• Good macroeconomic performance covers up
  vulnerability

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Post-Washington ConsensusFrom liberal
international economic order to market-friendly
approach to development

• Shift on values related to sustainable human
  development
• Return to development strategies with long-term
  perspectives and holistic approaches respecting
  historical specificity
• Preservation of LIEO in principle

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Main objective of development Transformation of
Society

• Increase in GDP per capita
• Improvement of living standards (literacy, health
  conditions etc.)
• Reduction of poverty
• Sustainable environment
• Durable policies, democratic processes
• Transformation of institutions
• Creation of new social capital and new capacities

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Elements of Strategy

• Vision of transformation of society,economy and
  institutions within the next 10 to 20 years
• Sequencing, for example
• Establishing a competition and regulatory
  framework before privatization
• Establishing a financial regulatory framework
  before capital market and financial sector
  liberalization
• Coordination providing appropriate
  infrastructure, human capital and institutions to
  support and foster development
• Coordination within and among the different
  levels of government
• Coordination between private sector and the
  public
• Coordination within the private sector
• Consensus building supports political and social
  stability by acceptance of policies and
  institutions

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Key Aspects

• Private sector development
• Public sector development
• Community development
• Family development
• Individual development

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Private SectorStrong, competitive, stable,
efficient

• Legal infrastructure
• Competition law and enforcement conditions
• Bankruptcy law
• Commercial law
• Regulatory framework
• Private provision of infrastructure as far as
  possible
• Feasible competition
• No abuse of market power
• Subsidiary public provision of infrastructure
• Stable macroeconomic framework
• Stable and effective financial system incl.
  regulatory framework
• Safety, competition, protection of depositors,
  confidence for investors in the securities
  markets
• Elimination of distortions

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Public SectorCrucial questions

• What should the government do?
• Environment for private sector
• Access to health, education
• How should the government do it?
• Effective civil service
• Market or market-like mechanisms for public
  activities
• How can private and public sector can complement
  each other?
• What tasks should be undertaken by what level of
  government?
• How to interact with civil society?

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Communities development

• Priority of local level
• Conditions
• Preferences
• Circumstances

• Participation and commitment
• Development effectiveness

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Family and Individual Development

• Family
• Autonomy in decision about children
• Female education
• Garantuee of nutrition
• Provision of health service
• Individual
• Education
• Health

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Political approaches IAllocation of Resources

• Allowing returns on physical and human capital
• Provision of complimentary inputs
• Economic environment
• Well functioning institutions
• Development of physical and human capital
• Preserving natural resources
• Encouraging savings and investment
• Providing and financing schools
• Use and renewal of natural resources

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Political Approaches II

• Economic management
• Macro-stabilization
• Liberalization
• Privatization
• Identifying, adressing and avoiding distortions
• Knowledge management
• Education
• Research and development
• Creation and diffusion of knowledge and
  technology
• Sectoral and regional aspects
• Capacity-building in providing organizational and
  social capital

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New Agenda as Post-Washington Consensus

• Reducing vulnerability of countries to crises
• Completing first-generation reforms
• Introducing second-generation reforms
• Income distribution and social sector

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Reducing vulnerability I

• Shift of export profile from primary commodities
  to diversified industrial base
• Sound fiscal policy
• Budget surpluses in times of prosperity to reduce
  public debt and to have scope for stabilizing
  deficit strategies (working of built-in-stabilizer
  s)
• Hard budget constraints for subnational
  governments
• Entitlements to transfers related to expenditure
  rather than tax revenue
• Accumulation of stabilization fund out of export
  revenues

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Reducing vulnerability II

• Sufficiently flexible exchange rate regime
• Possible improvement of competitiveness through
  currency depreciation
• Large countries avoiding dollarization for
  purposes of savings, contracting loans
• Complementing flexible exchange rate regime by
  monetary policy focused on low inflation
• Proper regulation of banking system respective
  financial sector
• Encouraging domestic savings, i.e. reducing
  dependency of capital imports ( pension
  reforms)

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Completing First-Generation Reforms

• Labor market reform
• Abolition of rigidities
• expansion of formal economies,
• flexibility
• Information and transparency
• Skill certification
• Occupational training system
• Trade policy
• Access to markets of Europe and North America
• Privatization
• Competition
• Proper regulation
• Supervision of financial sector

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Second-Generation Reforms

• Teachers, judiciary, civil service
• Provision of infrastructure
• Stable and predictable macroeconomic framework
• Legal and political environment
• Strong human resource base
• Innovation system
• Research, development, diffusion of technology
• Encouraging venture capital
• Property rights (problem informal sector)
• Bankruptcy law
• Political reform (balance of power between
  president and legislature

• Creating and maintaining institutional
  infrastructure of a market economy
• Providing public goods
• Internalizing externalities

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Income Distribution and Social Sector Economic
Growth and Redistribution

• Growth often weak dynamics in favour for the
  poor
• Redistribution
• Equalizing opportunities
• Reversion of shift from consumption taxes to
  direct taxes
• Increasing tax enforcement and collection (flight
  capital!)
• Development of property taxation
• Elimination of loopholes
• Increasing of spending on basic social services
• Social safety net
• Education
• health

Okuns big trade-off
Total income
Washington consensus
Equity
Source Williamson (2003)
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Priorities

• Education as core of development
• Infrastructure
• Communication
• Transportation
• Health as fundamental human right
• Knowledge
• Capacity-building
• Institutions, leadership to catalyse, absorb,
  manage the process of change
• Partnership to donors and society