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Growth in the 1990s: Pleasant and Unpleasant

Surprises

Presentation to ICRIERSeptember 28, 2004

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Five disappointmentsLength, depth, and variance in the “transition recession” in the FSU/EE countriesSeverity and intensity of the financial crisesArgentina’s implosionWeakness of the response to reform, particularly in Latin AmericaContinued stagnation in Sub-Saharan Africa

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How long? How Deep?

TimeBeginningOf transition

Duration

Depth

Output

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Deep, long, and variable

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Markets miss the mark on East Asia

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

100.0%

Thailand Indonesia Korea

Interest ratedifferential, June 1997

Nominal devaluation,June-December 1997

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Collapse of convertibility in Argentina

The Mexican debt crisis marked the end of one era, the Argentina crisis perhaps the end of anotherThe severity given the collapse was not a surprise—it was design.What was surprising was that it collapsed in spite of every attempt to “pre-commit”

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Growth came, but did not stay in Latin America, despite steady reform progress

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The predicted “renaissance” in Africa recedes into the future…

While there are brief episodes of growth in some SSA countries, there is no “locomotive” to pull the rest along.This is a disappointment, but a surprise?

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Growth in the 1990s: A Mixed Record(divergence “big time”)

Lessons from the 1990s

60

80

100

120

140

160

180

200

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Per c

apita

GDP

(199

0=10

0)

EAP ECA LAC MNA SAR AFR OECD

AFR

ECA

OECDLACMNA

SAR

EAP

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Four pleasant surprisesStrong growth in the India, China, and Vietnam.Robust progress in social indicators, in spite of low growth in many countriesResilience of the world economy to stressesBright spots of continued growth

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Coal to Newcastle: Growth rates in India (per capita, PPP)

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The star performers in growth are middle of the pack in many indicators

Rank in: Control of corruption

Regulatory quality

Growth

China 63 94 3Vietnam 105 135 4India 86 101 14Out of N: 151 180 136

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Brazil has slow growth but substantial progress on enrollments—especially of the poor

94

98 99

75

95

83

97

87

93

97

1992 2001

1st quintile poorest 20%

2nd quintile 3rd quintile 4th quintile 5th quintile richest 20%

Percentage

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A pleasant surprise: the sky did not fall

I would say the biggest misjudgment that I can remember making…was the sense of profound pessimism about Russian economic reform that I had in the fall of 1998, and that if you had said that by 2003, they would be issuing Eurobonds at300 basis points spreads, I would have thought that its was absolute madness. Lawrence Summers, in Practitioners in Development

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Continued growth, in spurts

The 1990s did see rapid growth in a number of countries…

• Dominican Republic• Uganda• Poland• Chile

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What did we learn about growth?

Growth is enormously volatile over the medium run—with many booms and busts—little growth persistenceThe “symptoms and syndromes” emerge from growth regressionsCentrality of “institutions”

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Growth is not steady, but is a series of episodes…

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And from millions of growth regressions? Syndromes

Syndrome Symptoms ExcessiveGeneralization

Bad Governance Corruption, instability

“democracy is good/bad for growth”

MacroeconomicInstability

High and variable inflation

“Reducing deficits will increase growth”

External policy Inability to finance needed imports

“Tariff reductions will raise growth”

Financial sector Low savings rates

“Privatization of banks will raise growth”

Bad Luck Terms of trade shocks

“Resource exporters will have slow growth”

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“Institutions” are centralThe first, overwhelming lessons we learned

in the 1990s, is the transcendent importance of the quality of institutions and the closely related question of the efficacy of the administration. Well- executed policies that are 30 percent off are much more effective than poorly executed policies that are spot on.

• Lawrence Summers, Practitioners in Development