joanna tyrowicz institutions and growth institutional economics
TRANSCRIPT
Joanna Tyrowicz
Institutions and growth
Institutional Economics
2
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)…
How to get to the long run?
3
solutionproblem
Low agricultural productivity
Price liberalization
Private incentives Land privatization
Fiscal revenues Tax reform
Urban wages Corporatization
Monopoly Trade liberalization
Unemployment Safety nets
Enterprise restructuring
Financial sector reform
And so on...
The logic of Washington Consensus
4
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.
5
“Augmented” Washington Consensus the previous 10 items, plus:
1. Fiscal discipline2. Reorientation of public expenditures3. Tax reform4. Financial liberalization5. Unified and competitive exchange rates6. Trade liberalization7. Openness to DFI8. Privatization9. Deregulation10.Secure Property Rights
11. Corporate governance 12. Anti-corruption13. Flexible labor markets14. WTO agreements15. Financial codes and standards16. “Prudent” capital-account opening 17. Non-intermediate exchange rate regimes18. Independent central banks/inflation targeting19. Social safety nets20. Targeted poverty reduction
Original Washington Consensus
Washington Consensus revival
6
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
1971-1980
1981-1990
1991-2000
Deception of Washington Consensus
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Deception of Washington Consensus
8
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)
Many possible institutional forms…
9
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
Many possible forms … cont’d
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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
Many possible forms … cont’d
11
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
12
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?
13
income
institutionstrade
geographyexogenous
partlyendogenous
endogenous endowments productivity
Central question of development economics: which are the most important arrows and why?
All of development economics … on one page
14
income
institutionstrade
geography
endowments productivity
1, 2
4
31: natural resources; soil quality
2: public health
3: colonialism, wars, migrations
4: resource curse
Geographical determinists claim that…
15
income
institutionstrade
geography
endowments productivity
Integration convergence
… trade fundamentalists claim that …
16
income
institutionstrade
geography
endowments productivity
One kind versus many?
Where do they come from?
…. While the institutionalists prefer
17
log yi = µ + α INSi + β INTi + γ GEOi + ε i (1)
INSi = + INTi + ψ GEOi + v INSi (2)
INTi = + INSi + ω GEOi + v INTi (3)
Determinants of wealth
18
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)
19
settler mortality between 17th and 19th century
settlements
type of early institutions
current institutions
current performance
Mortality rates of early European settlers as an instrument for institutional quality: the AJR theory
Good instrument versus good theory…
20
theoretical concept
empirical proxy instrument
geography distance from equator, mean temperature, etc.
--
integration trade/GDP ratio predicted trade share constructed from a bilateral gravity equation (Frankel and Romer, 1999)
institutional quality
survey of investor perceptions regarding protection of property rights, rule of law, etc.
mortality rates among 19th century European settlers (Acemoglu et al., 2001)
Basic implementations into empirics
21
exp
rop
ria
tion
ris
k, 1
98
5-9
5
Log settler mortality2.14593 7.98617
3.5
10
AGO
ARG
AUS
BFA
BGD
BHS
BOL
BRA
CAN
CHL
CIV
CMR
COG
COL
CRI
DOM
DZAECUEGY
ETH
GAB
GHA
GIN
GMB
GNB
GTM
GUY
HKG
HND
HTI
IDN
IND
JAM
KENLKA
MAR
MDG
MEX
MLI
MLT
MMR
MYS
NER
NGA
NIC
NZL
PAKPAN
PER
PNG
PRY
SDN
SEN
SGP
SLE
SLV
SUR
TGO
TTO
TUNTZA
UGA
URY
USA
VEN
VNM
ZAF
ZAR
Instruments and theories…
22
lcg
dp
95
Log settler mortality2.14593 7.98617
5.77144
10.2414
AGO
ARG
AUS
BDI
BENBFA
BGD
BHS
BLZ
BOL
BRA
BRB
CAF
CAN
CHL
CIVCMR
COG
COLCRI
DJI
DOMDZA
ECUEGY
ETH
FJI
GAB
GHA
GIN
GMB
GNB
GTM
GUY
HKG
HND
HTI
IDN
IND
JAM
KEN
LAO
LKAMAR
MDG
MEX
MLI
MLT
MMR
MRT
MUS
MYS
NERNGA
NIC
NZL
PAK
PAN
PER
PNG
PRY
RWA
SDNSEN
SGP
SLE
SLV
SUR
TCDTGO
TTO
TUN
TZA
UGA
URY
USA
VEN
VNM
ZAF
ZAR
Instruments and theories … cont’d
23
Extended AJR sample
Dependent variable
log GDP per
capita 1995
log GDP per
capita 1995
log GDP per
capita 1995
log GDP per
capita 1995
log GDP per
capita 1995
log GDP per
capita 1995
log GDP per
capita 1995
log GDP per
capita 1995
log GDP per
capita 1995 RULE LCOPEN
(10) (11)
Geography (DISTEQ) 0.74 0.20 0.32 0.81 0.25 0.36 0.76 0.21 0.24 0.82 -0.72(4.48) * (1.34) (1.85) ** (5.35) * (1.85) *** (2.37) ** (10.59) * (2.75) * (2.9) (5.71) * (-3.47) *
Institutions ( RULE) 0.78 0.69 0.79 0.70 0.80 0.77 0.57(7.56) * (6.07) * (8.96) * (6.86) * (12.41) * (10.71) * (4.14) *
Integration (LCOPEN) 0.16 0.15 0.08 0.34(1.48) (1.61) (1.31) (3.37) *
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 1.76 2.00 1.19 1.32 0.77(4.29) * (3.78) * (4.4) * (3.55) * (7.91) * (6.77) * (2.33) **
Integration (LCOPEN) -0.18 -0.302 -0.17 0.23(-1.23) (-1.07) (-1.35) (2.04) **
No. of observations 64 64 64 80 80 80 140 140 140 80 80R-square 0.25 0.54 0.562 0.264 0.51 0.52 0.417 0.50 0.55 0.54 0.38Test for over-identifying restrictions (p-value) (0.0071) (0.0365)
Dependent variable LCOPEN RULE
Geography (DISTEQ) 0.41 0.47 -0.25 0.46 0.53 -0.19 0.65 0.64 -0.04 0.01 0.46(2.8) * (3.21) * (-1.99) *** (3.25) * (3.76) * (-1.42) (10.35) * (10.92) * (-0.75) (0.09) (3.25) *
Settler mortality (LOGEM4) -0.39 -0.40 -0.30 -0.34 -0.34 -0.27 -0.28(-3.87) * (-4.1) * (-3.49) * (-3.63) * (-3.75) * (-3.2) * (-3.63) *
Population speaking 0.19 0.18 0.17English (ENGFRAC) (2.69) * (2.69) * (2.66) *
Population speaking other 0.12 0.16 -0.11European langages (EURFRAC) (1.74) *** (2.43) ** (-1.65)
Constructed openness 0.20 0.90 0.19 0.80 0.25 0.70 0.80(LOGFRANKROM) (1.95) ** (10.28) * (2.16) ** (9.68) * (4.37) * (12.4) * (9.10) *
F-statistic n.a. 22.9 17.2 41.7 n.a. 23.3 17.8 37.2 n.a. 46.3 44 42 45.0 23.3
R-square 0.41 0.44 0.66 0.36 0.39 0.58 0.49 0.55 0.54 0.53 0.36
Table 2: Determinants of Development: Core Specifications
AJR sample Extended AJR sample
(3) (9)(7)(6)(5)(4) (8)
Large sample
(2)(1)
RULE RULE
Panel A. Ordinary least squares
Panel B. Two-stage least squares
Panel C: First Stage for Endogenous Variables (Institutions (RULE) and Integration (LCOPEN))RULELCOPEN LCOPENRULE LCOPEN RULE RULE
Bottom line results
24
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)
Distance from Equator
25
e( lc
gdp9
5 | X
,dis
teq
) + b
*dis
teq
(f) Distance from Equator
Residuals Linear prediction
0 64
-1.75562
2.65895
GAB
UGA
ECU
RWA
KENSTP
SGP
CMR
BDI
GNQ
MYS
SYC
COG
COL
ZAR
CAF
CIV
SURGHA
IDN
GUYBEN
TZATGO
LKA
AGO
PAN
SLE
ETH
NGA
CRIGIN
PNG
TTO
VEN
GNB
KHM
DJICOM
MLI
NIC
BFATCD
PER
THA
BRB
MWI
SLV
NERVCT
GMB
GTM
SEN
PHL
CPV
HND
BRA
SDN
ZMBYEM
MMRBOL
BLZ
ZWE
LAO
MDG
MRT
HTI
DOM
FJI
JAM
MEXMUS
VNM
NAM
HKG
BGD
CUB
OMN
BWA
SAUQAT
MOZ
ZAF
BHS
PRY
TWN
SWZ
BHR
NPL
IND
KWT
EGY
LSO
JOR
ISR
PAK
LBN
CHL
MAR
SYR
URY
ARG
CYP
JPN
MLT
IRN
AUS
DZATUN
GRC
KORUSA
PRTTUR
CHN
ESP
ALB
ITA
NZLBGR
ROM
CANCHE
HUN
MNG
AUT
FRA
LUX
BELCZE
GBR
DEU
POL
NLD
IRL
RUS
DNKSWENOR
FIN
ISL
Predicted (fitted) distance measure
26
Lo
g R
ea
l GD
P p
er
cap
ita in
19
95
(e) Log Openness
Log Real GDP per capita in 1995 Linear prediction
2.55341 5.77982
5.77144
10.4544
AGO
ALB
ARG
AUS AUT
BDI
BEL
BENBFA
BGD
BGR
BHR
BHS
BLZ
BOL
BRA
BRB
BWA
CAF
CANCHE
CHL
CHN
CIVCMRCOG
COL
COM
CPV
CRICUB
CYPCZE
DEU
DJI
DNK
DOMDZA
ECUEGY
ESP
ETH
FIN
FJI
FRA
GAB
GBR
GHA
GIN
GMB
GNB
GNQ
GRC
GTM
GUY
HKG
HND
HTI
HUN
IDN
IND
IRL
IRN
ISL
ISR
ITA
JAMJOR
JPN
KENKHM
KOR
KWT
LAO
LBN
LKA
LSO
LUX
MAR
MDG
MEX
MLI
MLT
MMR
MNG
MOZ
MRT
MUS
MWI
MYS
NAM
NERNGA
NIC
NLDNOR
NPL
NZL OMN
PAK
PAN
PER
PHLPNG
POL
PRT
PRY
QAT
ROM
RUS
RWA
SAU
SDNSEN
SGP
SLE
SLV
SUR
SWE
SWZ
SYC
SYR
TCDTGO
THA
TTO
TUNTUR
TWN
TZA
UGA
URY
USA
VEN
VNM
YEM
ZAF
ZAR
ZMB
ZWE
Opennes
27
e(
lcg
dp
95
| X
,Lo
gO
pe
nH
at )
+ b
*Lo
gO
pe
nH
at
(e) Predicted Log Openness
Residuals Linear prediction
2.919 5.37554
-2.99292
1.35991
CHN
BRA
INDRUS
MEXUSA
ARG
IDN
JPN
CHLCAN
AUS
COL
PERVEN
BOL
PAK
ETH
CUB
NGA
PHL
ZAF
ZAR
VNM
IRN
THA
ESP
MDG
PRY
BGD
ECUPNG
TURMMR
MOZ
FRA
SDN
EGY
TZA
ZWE
AGONZLMAR
TCD
POL
MNG
NER
URY
MWINPL
ITA
MLI
KEN
DZADEU
KOR
UGA
PRT
ZMB
BFA
LKA
SAU
CAF
SWECMR
YEM
CIV
ROM
TWN
MYS
DOM
FJI
CZEFINGTM
CRI
GHA
GBRLSO
HTISENNIC
NOR
KHM
NAM
PAN
TUN
HNDMRT
SLV
BWACHEGIN
HUN
GRC
BDI
AUTCOG
MUS
LAORWA
DNK
SLE
ISLBGR
GAB
SUR
NLD
OMN
JAM
HKG
SYR
CPV
GUY
KWT
ALB
TGO
GNB
BEN
BEL
IRL
COM
TTO
CYPISR
GMB
SGP
SWZBHS
LBNGNQJOR
QAT
BHR
DJI
STP
SYC
MLT
BRB
BLZVCT
LUX
Predicted (fitted) Opennes
28
Lo
g R
ea
l GD
P p
er
cap
ita in
19
95
(d) Rule of Law
Log Real GDP per capita in 1995 Linear prediction
-2.08859 1.90945
5.77144
10.4544
AGO
ALB
ARG
AUSAUT
BDI
BEL
BENBFA
BGD
BGR
BHR
BHS
BLZ
BOL
BRA
BRB
BWA
CAF
CANCHE
CHL
CHN
CIVCMRCOG
COL
COM
CPV
CRICUB
CYPCZE
DEU
DJI
DNK
DOMDZA
ECU EGY
ESP
ETH
FIN
FJI
FRA
GAB
GBR
GHA
GIN
GMB
GNB
GNQ
GRC
GTM
GUY
HKG
HND
HTI
HUN
IDN
IND
IRL
IRN
ISL
ISR
ITA
JAMJOR
JPN
KEN KHM
KOR
KWT
LAO
LBN
LKA
LSO
LUX
MAR
MDG
MEX
MLI
MLT
MMR
MNG
MOZ
MRT
MUS
MWI
MYS
NAM
NERNGA
NIC
NLDNOR
NPL
NZLOMN
PAK
PAN
PER
PHLPNG
POL
PRT
PRY
QAT
ROM
RUS
RWA
SAU
SDNSEN
SGP
SLE
SLV
SUR
SWE
SWZ
SYC
SYR
TCDTGO
THA
TTO
TUNTUR
TWN
TZA
UGA
URY
USA
VEN
VNM
YEM
ZAF
ZAR
ZMB
ZWE
Rule of Law
29
e(
lcg
dp
95
| X
,Ru
leL
aw
Ha
t ) +
b*R
ule
La
wH
at
(d) Predicted Rule of Law
Residuals Linear prediction
-1.18734 1.92975
-2.59633
2.42011
IDN
UGA
ZAR
KEN
TZAETH
NGA
CMR
CAF
MYS
AGO
PNGLKA
CIV
RWA
GHA
THA
BDI
GAB
PHLECU
COG
TCDMLINER
MWI
BFA
SDN
IND
MMRSUR
COL
PER
MDG
GIN
ZMB
KHM
SLE
BRA
BOL
VNM
YEMTGO
SGP
ZWE
BENSENGNQ
STP
BGD
CHN
VENFJIMEX
GNB
PRY
MOZ
HTIMRT
COM
ZAF
LAO
SYCSAU
JPN
NPLGMB
EGY
PAK
TWN
NIC
GTM
DJI
NAMCRIPANBWA
IRN
HKG
MAR
OMN
LSOHND
SLVCUBDZA
TUR
DOM
KOR
CPV
MUS
ARG
KWT
SWZ
RUS
ITA
CHL
TUN
QAT
GUY
BHR
SYR
GRC
ISR
MNG
ROMJORLBN
CYP
BGR
ESP
URY
POL
TTO
ALB
HUN
USA
CZEMLT
AUS
PRT
JAM
CANSWENLDDNK
BLZ
NOR
FINBRBFRABHS
VCT
CHE
NZL
BELDEUISLAUT
LUX
GBRIRL
Predicted (fitted) Rule of Law
30
Lo
g R
ea
l GD
P p
er
cap
ita in
19
95
colonized by Europeans 0 1
5.83834
10.3875
Instruments and theories … cont’d
31
(3) (4) (5)
Geography (DISTEQ) -0.70 -1.34 -0.66 -0.90 -0.58 -0.14 -0.14 0.02 -0.36 -0.96 -0.67 -0.81(-1.34) (-1.08) (-1.38) (-1.14) (-0.81) (-0.91) (-0.91) (0.17) (-2.12) ** (-1.45) (-0.98) (-1.27)
Institutions (RULE) 2.00 2.68 1.82 2.82 1.97 1.32 1.32 0.90 1.69 2.43 2.22 2.13(3.55) * (3.03) * (3.31) * (2.43) ** (1.67) *** (6.77) * (6.77) * (8.47) * (4.87) * (3.09) * (2.56) * (2.97) *
Integration (LCOPEN) -0.302 -0.44 -0.31 -0.75 -0.42 -0.17 -0.17 0.03 -0.36 -0.41 -0.23 -0.32(-1.07) (-1.68) (-1.23) (-1.30) (-0.81) (-1.35) (-1.35) (0.25) (-1.46) (-1.50) (-0.79) (-1.12)
REGIONAL DUMMIES Latin America (LAAM) 0.44 0.17 0.25
(1.25) (0.33) (1.655) ***
Sub-Saharan Africa (SAFRICA) -0.19 -0.43 -0.63(-0.51) (-1.11) (-3.79) *
East Asia (ASIAE) 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 0.52 0.56 0.65 0.44 0.63 0.55 0.55 0.67 0.55 0.53 0.56 0.59No. of observations 80 78 79 76 76 140 140 137 136 80 80 80
Omitted observations Singapore Ethiopia Australia Australia Cuba Australia None None NoneEthiopia Canada Canada Czech Rep. Canada
New Zealand New Zealand Germany New ZealandUSA USA USA
Table 4. Determinants of Development: Robustness to "Influential" Observations, Neoeuropes, Legal Systems, Origin of Colonizer, and Religion
None None None
Baseline 2 (2)*Baseline 1 (1)** (1)***(1)* (2)**
Two-stage least squares: Dependent variable is log GDP per capita in 1995
(2)***(1)****
Decomposition of wealth…
32
Deep economic integration
Democratic politics
Nation state
Golden Straitjacket
Pick two, any two: cannot have deep integration, nation state and democracy simultaneously
Global Federalism
Bretton Woods compromise
Political trillemma of the modern world
33
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 innovationsOutward orientation combined with industrial policies in East Asia;
Partial liberalization combined with household responsibility system
EPZ in Mauritius
Capital controls in Chile
Testing in practice
34
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 placesMost 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.
But innovations do not travel too well
35
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.)
36
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.
A toy model
37
yi-output ai-policy zi-country type, yi = -(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 + , with - N (0, ). 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 = -(aA - zB)2 if aB = aA
uB = yB - K = -(a'B - zB)2 - K if aB = a'B
E(uB) = -(aA - zB)2 if aB = aA = -2 - K if aB = a'B
Mimic the leader as long as zB is in the interval: [aA - (2 + K/)1/2, aA + (2 +
K/)1/2]. Therefore E(y) equals -( aA - zB)2 if aB = aA, and -2 otherwise.
Toy model solution
38
zh* zeff zc* z1=1=a1
z1=1=a1
ANeighbors
C B Periphery`Far' 'Near'
ExpectedNationalIncome
Follower government’s type
0
Income of `Leader’
Toy model solution
39
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.
Toy model conclusions
40
41
Growth and distance from Brussels
42distance from Brussels (miles)
growth since onset of reform Fitted values
448 4225
-.10982
.03399
CZE
SVN
SVK
HRV
HUN
POL
LVALTU
ALB
EST
BLR
MKD
BGR
ROM
MDA
UKR
RUS
GEO
ARM
AZE
TKM
UZB
TJK
KGZ
KAZ
MNG
Growth and distance from Brussels
43
Growth and distance from Brussels
44
„Reform” and distance from Brussels
45
Voice and accountability and distance from Brussels
46
Control of corruption and distance from Brussels
47
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….
Early conclusions
48
a. Markets are not self-creatingi. Property rightsii. Contract enforcement
b. Markets are not self-regulatingi. Regulatory authoritiesii. Correction of market and coordination failures
c. Markets are not self-stabilizingi. Monetary, fiscal and currency arrangements
d. Markets are not self-legitimatingi. Political democracyii. Social insuranceiii. Redistribution
Markets require non-market institutions to work well
49
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)
The institutional basis for market economies is not unique
50
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?
Institutional diversity as a source of transaction costs blocking deep
integration
51
Key Standards According to the Financial Stability Forum
Subject Area Key Standard IssuingBody
Macroeconomic Policyand Data TransparencyMonetary and financialpolicy transparency
Code of Good Practices on Transparency in Monetary andFinancial Policies
IMF
Fiscal policy transparency Code of Good Practices in Fiscal Transparency IMFData dissemination Special Data Dissemination Standard/
General Data Dissemination SystemIMF
Institutional and MarketInfrastructureInsolvency World BankCorporate governance Principles of Corporate Governance OECDAccounting International Accounting Standards (IAS)3 IASCAuditing International Standards on Auditing (ISA) IFACPayment and settlement Core Principles for Systemically Important Payment
SystemsCPSS
Market integrity The Forty Recommendations of the Financial Action TaskForce
FATF
Financial Regulation andSupervisionBanking supervision Core Principles for Effective Banking Supervision BCBSSecurities regulation Objectives and Principles of Securities Regulation IOSCOInsurance supervision Insurance Supervisory Principles IAIS
Source: FSF
There is just about 64 standards….
52
foreign reserves
(mil $, 2000:I)
reserves in
months of
imports
"excess" reserves
(% of GDP)
annual social cost of excess reserves
(% of GDP)*
South Korea 83,581 7.0 0.12 0.70Peru 9,041 12.2 0.12 0.72
* Assuming a 6% spread between the yield on foreign reserves and themarginal cost of public borrowing.
… and even if you comply…
53
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
… some costs…
54
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 de-
institutionalize 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?
Some illustrative trade-offs