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Institutions, Integration, and Geography: In Search of the Deep Determinants of Prosperity

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Deep determinants of income levels: geography, integration (trade), and institutions ... Institutions trump geography and trade. Policy implications: 'one way' ... – PowerPoint PPT presentation

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Title: Institutions, Integration, and Geography: In Search of the Deep Determinants of Prosperity


1
Institutions, Integration, and Geography In
Search of the Deep Determinants of Prosperity
  • Dani Rodrik
  • Harvard University
  • October 2002

2
Outline
  • Deep determinants of income levels geography,
    integration (trade), and institutions
  • Institutions trump geography and trade
  • Policy implications one way versus many ways
  • The institutional reform agenda of the
    Washington Consensus has produced disappointing
    results
  • Need for an alternative based on the recognition
    that
  • Institutional functions do not uniquely determine
    institutional forms
  • In practice, successful growth strategies vary
    greatly
  • Reevaluating the balance between institutional
    convergence and diversity
  • Implications for global arrangements
    incompatibility of deep integration, nation
    states, and political democracy

3
All of development economics on one page
income
endogenous
endowments
productivity
institutions
trade
partly endogenous
geography
Central question of development economics which
are the most important arrows and why?
exogenous
4
Geographical determinists
income
endowments
productivity
4
institutions
trade
1, 2
3
1 natural resources soil quality 2 public
health 3 colonialism, wars, migrations 4
resource curse
geography
5
Trade fundamentalists
income
endowments
productivity
institutions
trade
geography
Integration ? convergence
6
Institutionalists
income
endowments
productivity
institutions
trade
One kind versus many? Where do they come from?
geography
7
Figure 1 Correlations between Income and its
Deep Determinants Unconditional (Left Panel)
and Conditional (Right Panel) Scatter Plots
8
Note The scatter plots on the right-hand side
panel are generated from a two-stages least
squares regression, with openness and
institutional quality both instrumented. Details
can be found in Rodrik, Subramanian, and Trebbi
(2002).
9
Meanwhile, back in the real world...
The Washington Consensus is dead long live the
new Washington Consensus!
Original Washington Consensus
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  
10
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 is was Argentina!)
  • Countries in transition from socialism Real
    output below 1990 levels in all but four former
    socialist economies poverty rates remain higher
    1990 even in the most successful countries (e.g.,
    Poland)
  • Sub-Saharan Africa Results remain very
    disappointing, and far worse than those obtained
    prior to the late 1970s
  • Widening income gaps Income inequalities have
    worsened in most of the countries that have
    adopted the WC agenda
  • Frequent and painful financial crises East Asia,
    Brazil, Russia, Argentina, Turkey.

11
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12
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13
The logic of the Washington Consensus
  • solution
  • problem

Price liberalization
Low agricultural productivity
Land privatization
Private incentives
Tax reform
Fiscal revenues
Corporatization
Urban wages
Monopoly
Trade liberalization
Enterprise restructuring
Financial sector reform
Safety nets
Unemployment
And so on...
14
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

15
Multiplicity of desirable institutional forms
INSTITUTIONAL ARRANGEMENTS What type of property
rights? Private, public, cooperative? What type
of legal regime? Common law? Civil law? Adopt
or innovate? What is the right balance between
decentralized market competition and public
intervention? 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)
UNIVERSAL PRINCIPLES Property rights Ensure
potential and current investors can retain the
returns to their investments Incentives Align
producer incentives with social costs and
benefits. Rule of law Provide a transparent,
stable and predictable set of rules.
OBJECTIVE Productive efficiency (static and
dynamic)
16
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?
UNIVERSAL PRINCIPLES Sound money Do not
generate liquidity beyond 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.
OBJECTIVE Macroeconomic and Financial Stability

17
INSTITUTIONAL ARRANGEMENTS How progressive
should the tax system be? 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.
UNIVERSAL PRINCIPLES Targeting Redistributive
programs should be targeted as closely as
possible to the intended beneficiaries.
Incentive compatibility Redistributive
programs should minimize incentive distortions.
OBJECTIVE Distributive justice and poverty
alleviation
18
The Empirical Record
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
19
The Empirical Record (cont.)
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 and TVEs in China EPZ
in Mauritius Capital controls in Chile.
20
The Empirical Record (cont.)
3. Institutional innovations do not travel
well. HRS works in China, but not in SU ISI
works in Brazil but not Argentina EPZs work in
Mauritius, but not in most other
countries Gradualism works well in India but
not in Ukraine.
21
How to get to the Long Run Two Elements of a
Growth Strategy
  • An investment strategy
  • An institution-building strategy

22
Examples of successful investment strategies
  • Import-substituting industrialization (Brazil,
    Mexico, Turkey)
  • Outward-orientation, East Asian style (South
    Korea, Taiwan)
  • Two-track reform (China, Mauritius)

23
Implications for globalization and global
institutions  
  • Two key ideas
  • There are institutional limitations to how far we
    can push global economic integration
  • Within the set of feasible globalizations,
    there is more than a single blueprint
  • Building blocks
  •  
  • Markets require non-market institutions to work
    well
  • The institutional basis of market economies is
    not unique
  • Institutional diversity creates transaction costs
    and hampers full economic integration
  • Since it is neither feasible nor desirable to
    eliminate these transaction costs, our ambitions
    with regard to economic integration have to be
    limited
  • Within the range of thin globalizations that is
    feasible, we have considerable choice as to which
    model to select. Each one of these privileges
    different groups.


24
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) Trade the role of
regulatory jurisdictional discontinuities c)
Capital flows the problem of sovereign risk
25
  THE POLITICAL TRILEMMA OF THE WORLD ECONOMY
Deep economic integration
Golden Straitjacket
Global Federalism
Democratic politics
Nation state
Bretton Woods compromise
Pick two, any two
26
C. The trilemma of global economic
governance 1. Cannot have nation states,
democracy and full economic integration
simultaneously.   2.  Shallow integration,
thin set of rules more appropriate and
realistic   3. Policy autonomy for LDCs
valuable
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