Macroeconomic Factors and Growth: Theory and Case Studies Lecture 2: The Struggle for a „Post- Washington Consensus“ Bernhard Seidel

Macroeconomic Factors and Growth: Theory and Case Studies

Lecture 2: The Struggle for a „Post-Washington Consensus“

Bernhard Seidel

Dr. Bernhard SeidelSeptember 2003

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


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


The Main Elements of the „Washington Consensus“From 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


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 people‘s 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


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


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


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


Key Aspects

– Private sector development

– Public sector development

– Community development

– Family development

– Individual development


Private Sector:Strong, 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


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?


Communities development

Priority of local level

•Conditions

•Preferences

•Circumstances

–Participation and commitment

–Development effectiveness


Family and Individual Development

Family– Autonomy in decision about children– Female education– Garantuee of nutrition– Provision of health service

Individual– Education– Health


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


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


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


Reducing vulnerability I

– Shift of export profile from primary commodities to diversified industrial base

– Sound fiscal policyBudget surpluses in times of prosperity to reduce public debt and

to have scope for stabilizing deficit strategies (working of built-in-stabilizers)

– Hard budget constraints for subnational governmentsEntitlements to transfers related to expenditure rather than tax

revenue

– Accumulation of stabilization fund out of export revenues


Reducing vulnerability II

– Sufficiently flexible exchange rate regimePossible 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)


Completing First-Generation Reforms

– Labor market reform• Abolition of rigidities• expansion of formal economies, • flexibility• Information and transparency• Skill certification• Occupational training system

– Trade policyAccess to markets of Europe and North America

– Privatization• Competition• Proper regulation• Supervision of financial sector


Second-Generation Reforms

Creating and maintaining institutional infrastructure of a market economy

Providing public goods

Internalizing externalities

*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


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

Okun‘s big trade-offTotal income

Equity

Washington consensus

Source: Williamson (2003)


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

Documents

Macroeconomic Factors and Growth: Theory and Case Studies Lecture 2: The Struggle for a „Post- Washington Consensus“ Bernhard Seidel