Transcript Wspólna Polityka Rolna i Polityka Rozwoju

Joanna Tyrowicz
Institutions and growth
Institutional Economics
How to get to the long run?

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)…
2
The logic of Washington Consensus
problem
solution
Low agricultural productivity
Price liberalization
Private incentives
Land privatization
Fiscal revenues
Tax reform
Urban wages
Corporatization
Monopoly
Trade liberalization
Enterprise
restructuring
Unemployment
Financial sector
reform
Safety nets
And so on...
3
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.
4
Washington Consensus revival
Original Washington
Consensus
“Augmented” Washington Consensus
the previous 10 items, plus:
1. Fiscal discipline
2. Reorientation of public
expenditures
3. Tax reform
4. Financial liberalization
5. Unified and competitive
exchange rates
6. Trade liberalization
7. Openness to DFI
8. Privatization
9. Deregulation
10.Secure Property Rights
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
5
Deception of Washington Consensus
1971-1980
1981-1990
1991-2000
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
6
Deception of Washington Consensus
7
Many possible institutional forms…
OBJECTIVE
UNIVERSAL PRINCIPLES
Productive
Property rights: Ensure
efficiency
potential and current
(static and dynamic) investors can retain the
returns to their investments
INSTITUTIONAL ARRANGEMENTS
What type of property rights? Private,
public, cooperative?
What type of legal regime? Common
law? Civil law? Adopt or innovate?
Incentives: Align producer
incentives with social costs
and benefits.
What is the right balance between
decentralized market competition and
public intervention?
Rule of law: Provide a
transparent, stable and
predictable set of rules.
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”)
8
Many possible forms … cont’d
OBJECTIVE
UNIVERSAL PRINCIPLES
Macroeconomic Sound money: Do not
and Financial
generate liquidity beyond
Stability
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.
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?
9
Many possible forms … cont’d
OBJECTIVE:
UNIVERSAL PRINCIPLES:
INSTITUTIONAL ARRANGEMENTS
How progressive should the tax system be?
Distributive
justice and
poverty
alleviation
Targeting: Redistributive
programs should be
targeted as closely as
possible to the intended
beneficiaries.
Incentive compatibility:
Redistributive programs
should minimize incentive
distortions.
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.
10
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
11
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?
12
All of development economics
… on one page 
income
endogenous
endowments
partly
endogenous
exogenous
productivity
trade
geography
institutions
Central question of development
economics: which are the most
important arrows and why?
13
Geographical determinists claim that…
income
endowments
productivity
4
1, 2
trade
institutions
1: natural resources; soil quality
3
geography
2: public health
3: colonialism, wars, migrations
4: resource curse
14
… trade fundamentalists claim that …
income
endowments
productivity
trade
geography
institutions
Integration 
convergence
15
…. While the institutionalists prefer
income
endowments
productivity
trade
institutions
One kind versus many?
geography
Where do they come from?
16
Determinants of wealth
log yi = µ + α INSi + β INTi + γ GEOi + ε i
(1)
INSi = f + l INTi + ψ GEOi + v INSi
(2)
INTi = j + q INSi + ω GEOi + v INTi
(3)
17
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)
18
Good instrument versus good theory…
Mortality rates of early European settlers as an
instrument for institutional quality: the AJR theory
settler mortality
between 17th
and 19th century
settlements
type of early
institutions
current
institutions
current
performance
19
Basic implementations into empirics
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)
20
Instruments and theories…
10
USA
NZL
expropriation risk, 1985-95
AUS
CAN
SGP
IND
HKG
MY S
GMB
BRA
CHL
MEX
BHS
TTO
COL
VEN
MAR
CRI
URY
PRY
EGY
ECU
DZA
TUN
ARG
MLT
ZAF
PAK
GUY
MMR
ETH
LKA
PER
BOL
GAB
IDN
PNG
JAM
CIV
TGO
VNM
DOM
KEN
SEN
PAN
TZA
CMR
GIN
GHA
SLE
NGA
HND
BGD
GTM
SLV
NIC
AGO
NER
SUR
GNB
COG
UGA
BFA
SDN
MDG
MLI
HTI
ZAR
3.5
2.14593
7.98617
Log settler mortality
21
Instruments and theories … cont’d
SGP
USA
HKG
CAN
10.2414
AUS
NZL
BHS
BRB
MLT
MUS
ARG
URYTTO
CHL
MEX
BRA
VEN
COL
TUN
PRY
CRI
SLV
PER
DZA
GTM
EGY
ECU
MAR
LKA
MY S
ZAF
lcgdp95
FJI
GUY
DJI
MMR
PAK IND
SUR
GAB
BLZ
PAN
JAM
DOM
PNG
IDN
GIN
BOL
HND
BGD
SDN
NIC
HTI
VNM
LAO
SEN
KEN
GNB
ETH
CMR
CIV
COG
MRT
GHA
AGO
CAF
BEN
BFA
TCD
SLE
UGA NER MDGTGO
RWA
BDI
GMB
MLI
NGA
TZA
ZAR
5.77144
2.14593
7.98617
Log settler mortality
22
Bottom line results
Table 2: Determinants of Development: Core Specifications
AJR sample
Dependent variable
log
GDP
per
capita
1995
log
GDP
per
capita
1995
(1)
(2)
Geography (DISTEQ)
0.74
(4.48)
*
Institutions ( RULE)
Extended AJR sample
log
GDP
per
capita
1995
(3)
log
GDP
per
capita
1995
log
GDP
per
capita
1995
(4)
(5)
0.20
0.32
0.81
(1.34)
(1.85) **
(5.35)
0.78
(7.56)
*
Integration (LCOPEN)
log
GDP
per
capita
1995
(1.85)
Extended AJR sample
log
GDP
per
capita
1995
log
GDP
per
capita
1995
log
GDP
per
capita
1995
(6)
(7)
Panel A. Ordinary least squares
(8)
(9)
0.21
0.24
0.82
(2.75) *
(2.9)
(5.71)
0.25
*
Large sample
0.36
***
(2.37)
0.69
0.79
0.70
(6.07) *
(8.96) *
(6.86)
0.76
**
(10.59) *
0.80
*
RULE
(10)
LCOPEN
(11)
-0.72
*
0.77
(12.41) *
(-3.47) *
0.57
(10.71) *
(4.14) *
0.16
0.15
0.08
0.34
(1.48)
(1.61)
(1.31)
(3.37)
*
Panel B. Two-stage least squares
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
(4.29) *
(3.78) *
Integration (LCOPEN)
No. of observations
64
64
R-square
0.25
0.54
Test for over-identifying restrictions (p-value)
Dependent variable
Geography (DISTEQ)
RULE
0.41
(2.8) *
Settler mortality (LOGEM4)
-0.39
(-3.87) *
Population speaking
English (ENGFRAC)
Population speaking other
European langages (EURFRAC)
Constructed openness
(LOGFRANKROM)
F-statistic
n.a.
R-square
1.76
(4.4) *
2.00
1.19
1.32
0.77
(3.55) *
(7.91) *
(6.77) *
(2.33) **
-0.18
-0.302
-0.17
0.23
(-1.23)
(-1.07)
(-1.35)
(2.04) **
64
0.562
RULE
80
0.264
80
0.51
80
0.52
140
0.417
140
140
80
0.50
0.55
0.54
(0.0071)
(0.0365)
Panel C: First Stage for Endogenous Variables (Institutions (RULE) and Integration (LCOPEN))
LCOPEN
RULE
RULE
LCOPEN
RULE
RULE
LCOPEN LCOPEN
80
0.38
RULE
0.47
-0.25
0.46
0.53
-0.19
0.65
0.64
-0.04
0.01
0.46
(3.21) *
(-1.99) ***
(3.25) *
(3.76) *
(-1.42)
(10.35) *
(10.92) *
(-0.75)
(0.09)
(3.25) *
-0.27
-0.40
(-4.1) *
0.20
(1.95) **
-0.30
-0.34
-0.34
(-3.49) *
(-3.63) *
(-3.75) *
0.90
(10.28) *
22.9
17.2
41.7
0.41
0.44
0.66
n.a.
-0.28
(-3.2) *
(-3.63) *
0.19
0.18
0.17
(2.69) *
(2.69) *
(2.66) *
0.12
0.16
-0.11
(1.74) ***
(2.43) **
(-1.65)
0.19
0.80
0.25
0.70
0.80
(2.16) **
(9.68) *
(4.37) *
(12.4) *
(9.10) *
23.3
17.8
37.2
0.36
0.39
0.58
n.a.
46.3
44
42
45.0
23.3
0.49
0.55
0.54
0.53
0.36
23
Distance from Equator
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)
24
Predicted (fitted) distance measure
Residuals
e( lcgdp95 | X,disteq ) + b*disteq
2.65895
Linear prediction
SGP
HKG
MY S
GAB
SY C
THA
JPN
KWT
OMN
TWN
QAT
SAU
ITA
ISR
KOR
BHR
COL
BRA
CY P USA
MUS
ZAF
LKA PNG
VEN
MEX
GRC
ECU
FJI
PER
LUX
PRY
NLD DNK NOR
PHL
AUS
MLT
ESP
ARG
SWE
PAN
BWA
CHE
CRI
CAN
CZE
BEL
FIN
CMRCIV GIN
NAM BHS
FRA
CHL
TUR
SWZ
IRN PRT
BRB
GTMBOL
ZWE
KEN
DEU
TTO
EGY
STP
SLV MMR
AUT
HUN
CUB
NZL
RUS
URYTUN
COG
SUR
DZA
BGR
GHA AGO DJI CPV
MAR
LBN
IND
CAF
CHN
COM
DOM
UGA
POL
JOR
SY R
ROM
GNQ
KHM
NICSEN
SDN HTI VNM
RWA BEN
BLZ
BGD
GBR
VCT LAO
BDI GUYSLE
LSO PAK
NGA TCD
BFA
IRL
HND MRT
MLI
NER
TGO
GMB
ZMB
ALB
JAM
NPL
Y
EMMDG
TZA ETHGNB
MWI
MOZ
ZAR
IDN
ISL
MNG
-1.75562
0
64
Distance from Equator
(f)
25
Opennes
Log Real GDP per capita in 1995
10.4544
Linear prediction
LUX
USA
Log Real GDP per capita in 1995
CHE
KWT
JPN
CAN SWE DNKNOR
AUS
BEL
NLD
ISL
DEU
AUT
QAT
FRA
ITA
FIN
GBR
NZL
IRL
BHS
CY
P
ISROMN
ESP
CZE BRB
KOR PRT TWN
GRC
SAU MUS
ARG
SY C
HUN
URY CHL
MY S
TTO
GAB
MEX
POL
THAZAFRUS
BGR
BRA
VEN
TUR
BLZ
COL
PAN
TUN
BWA
PRY
CRI
LBNFJI
IRN
CUB
ROM
SLV
NAM
PER
JOR
DZA
GTM
JAM
CPV
SY
R
DOM
E
GY
ECU
PNG
IDN MAR
ALBLKA
PHL
GUY
CHN
GINBOL
ZWE
DJI
NIC
HND
LSO
MMR
IND
COM CIV
PAK
CMR
HTI
VNM
SUR
LAO
BGD
COG
SEN
MRT
GHA
NPL
KHM
AGO
MNG
GNQ
KEN
SDN
GMB
BENCAF
BFA SLE
TCD
MOZ
GNB Y EM
TGO
MLI
RWA UGA
NER
ZMB
BDI MDG
NGA
MWI
ETH
TZA
HKG
SGP
BHR
MLT
SWZ
ZAR
5.77144
2.55341
5.77982
Log Openness
(e)
26
Predicted (fitted) Opennes
e( lcgdp95 | X,LogOpenHat ) + b*LogOpenHat
Residuals
Linear prediction
SGP
1.35991
JPN
IDN
BRA
CHN
MY S
THA
HKG
GAB
TWN
SAU
OMNKWT
QAT SY C
ITA
COL
MEX
USA
VEN ZAF
PNG KOR
ECU
PER
LKA
ISR
MUS
BHR
FJI
CY P
PHL
PRY
AUS
ARG
GRC
ESP
CAN
PAN
CRI
DNK
BWA
NOR
CHL
SWE
CMR
GIN NLD
CHE
CIV
CZE
NAM
TUR
FRA
BOL IRN ZWE
MLT
KEN
GTM
BEL
EGY PRT FIN
RUS
CUBMMR
IND
DEU
SLV
BHS
SWZ
AGO
TTO
NZL
URY
BRB
COG
TUN
ISL
STP
AUT
DZA
CAF GHA
HUN
SUR
MAR
UGA
CPV
DOM
BGR
VNM
POL
COMLBN DJI
SDN
KHM
SEN
NIC
ROM
HTI
BGD
RWA
SY
R
NGA
JOR
GNQ
TCDBFA
PAK
LAO
BEN
BDI
MLI
GBR
LSO
HND
NER
MRT
GUY
SLE
BLZ
ETH
ZMB
MDG
VCT
TZA
TGO
NPL
IRL GMB
Y EM
MWI
JAM
GNB
MOZ
ALB
ZAR
LUX
MNG
-2.99292
2.919
5.37554
Predicted Log Openness
(e)
27
Rule of Law
Log Real GDP per capita in 1995
LUX
Log Real GDP per capita in 1995
10.4544
HTI
AGO
GNB
5.77144
Linear prediction
USA SGP
HKG
CHE
NOR
DNK
KWT BEL JPN
CAN
AUS
NLD
SWE
ISL
DEU
QAT
AUT
FRA
ITA
GBR FIN
IRL NZL
BHS
CYOMN
P
ISR
ESP
TWN
CZE
BHRKOR
MLT PRT BRB
GRC
SAU
MUS
ARG
SY C
HUN
CHL
MYTTO
S URY
GAB
MEXBRA ZAF
POL
RUS
THA
BGR
VEN
TUR
BLZ
COL FJI
PAN SWZ
BWA
TUN
PRY
CRI
IRN
CUB LBN
ROM
SLV
NAM
PER
JOR
DZA
GTM
JAM
CPV
SY
R
DOM
EGY
ECU
MAR
PNG
IDN
ALB PHL LKA
GUY
GIN BOL CHN
ZWE
DJI
NIC
HND
LSO
MMR PAK
COM IND
CIV
CMR
VNM
SUR
LAO
BGD
COG
MRT KHM SEN
GHA
NPL
MNG
GNQ
KENSDN
GMB
CAF
BEN
BFA
TCD
MOZ
SLE
TGO
UGA
MLI
RWA
NER
ZMB
Y EM
MDG
BDI
NGA
MWI
ETH
TZA
ZAR
-2.08859
1.90945
Rule of Law
(d)
28
Predicted (fitted) Rule of Law
Residuals
Linear prediction
LUX
2.42011
e( lcgdp95 | X,RuleLawHat ) + b*RuleLawHat
SGP
HKG
KWT
QAT
CHE
DNK
NOR BEL
USA
NLD
AUT
BHS
ISL
SWE
JPN
AUSCAN
ITA ISR CY P
OMN
FRA DEU
BRB
FIN
BHR
MLT
NZL
TWN
SY C
ESP CZE
KOR
GRC
PRT
MUS
SAU
TTO
VCT
MY S GAB
HUN
BLZ
URY
ARG
CHL
BGR
SWZ
THA
ZAF PAN
LBN POL
VEN
MEX
CRI
BWA
TUR
TUN
BRA FJI
COL
PRY NAM SLV RUS JOR
ROM
CPV
IRN CUB
JAM
SY R
GTM
PER
DZA
DOM
ECU
PNG
ALB
EGY
GUY
LKA
MAR
IDN
DJI
PHL GIN STP
ZWE
BOL
COM NIC
HND
LSO
CIV
MMR
CMR
SUR CHNHTI
GNQ LAOPAK
COG
SEN MRT
VNM
GHA IND
GMB
KHM
BGD
BEN
KEN AGO
NPL
SDN
CAF
MNG
SLE
TGO GNB
RWA
BFA
TCD
UGA
BDI
MLI
Y EM MOZ
NERZMB
MDG
NGA
MWI
GBRIRL
ETH
TZA
-2.59633
ZAR
-1.18734
1.92975
Predicted Rule of Law
(d)
29
Instruments and theories … cont’d
Log Real GDP per capita in 1995
10.3875
5.83834
0
1
colonized by Europeans
30
Decomposition of wealth…
Table 4. Determinants of Development: Robustness to "Influential" Observations, Neoeuropes, Legal Systems, Origin of Colonizer, and Religion
Baseline 1
(1)*
(1)**
(1)***
(1)****
Baseline 2
(2)*
(2)**
(2)***
(3)
(4)
(5)
Two-stage least squares: Dependent variable is log GDP per capita in 1995
Geography (DISTEQ)
Institutions (RULE)
Integration (LCOPEN)
-0.70
-1.34
-0.66
-0.90
-0.58
-0.14
-0.14
0.02
-0.36
-0.96
(-1.34)
(-1.08)
(-1.38)
(-1.14)
(-0.81)
(-0.91)
(-0.91)
(0.17)
(-2.12) **
(-1.45)
2.00
2.68
1.82
2.82
1.97
1.32
1.32
0.90
1.69
2.43
(3.55) *
(3.03) *
(3.31) *
(2.43) **
(1.67) ***
(6.77) *
(6.77) *
(8.47) *
(4.87) *
(3.09) *
-0.302
-0.44
-0.31
-0.75
-0.42
-0.17
-0.17
0.03
-0.36
-0.41
(-1.07)
(-1.68)
(-1.23)
(-1.30)
(-0.81)
(-1.35)
(-1.35)
(0.25)
(-1.46)
(-1.50)
REGIONAL DUMMIES
Latin America (LAAM)
Sub-Saharan Africa (SAFRICA)
East Asia (ASIAE)
0.44
0.17
(1.25)
(0.33)
-0.67
-0.81
(-0.98)
(-1.27)
2.22
(2.56)
2.13
*
-0.23
(-0.79)
(2.97)
*
-0.32
(-1.12)
0.25
(1.655) ***
-0.19
-0.43
-0.63
(-0.51)
(-1.11)
(-3.79) *
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
No. of observations
0.52
80
Omitted observations
None
0.56
78
Singapore
Ethiopia
0.65
79
Ethiopia
0.44
76
Australia
Canada
New Zealand
USA
0.63
76
Australia
Canada
New Zealand
USA
0.55
140
0.55
140
None
None
0.67
137
0.55
136
Cuba
Australia
Czech Rep. Canada
Germany
New Zealand
USA
0.53
80
0.56
80
0.59
80
None
None
None
31
Political trillemma of the modern world
Deep economic
integration
Golden
Straitjacket
Global
Federalism
Democratic
politics
Nation state
Bretton Woods compromise
Pick two, any two: cannot have deep integration, nation state and democracy
simultaneously
32
Testing in practice 
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 innovations
Outward orientation combined with industrial policies in East Asia;
Partial liberalization combined with household responsibility system
EPZ in Mauritius
Capital controls in Chile
33
But innovations do not travel too well
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 places
Most 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.
34
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.)
35
A toy model 
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.
36
Toy model solution
yi-output
ai-policy zi-country type,
yi = -q(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
= -q(aA - zB)2
if aB = aA
uB =
yB - K
= -q(a'B - zB)2 - K if aB = a'B
E(uB)
= -q(aA - zB)2
= -q2 - K
if aB = aA
if aB = a'B
Mimic the leader as long as zB is in the interval: [aA - (2 + K/q)1/2, aA + (2 + K/q)1/2].
Therefore E(y) equals -q( aA - zB)2 if aB = aA, and -q2 otherwise.
37
Toy model solution
C
B
A
Neighbors
Periphery
`Far'
'Near'
Expected
National
Income
Income of
`Leader’
0
zh*
zeff
zc*
z1=1=a1
z1=1=a1
Follower government’s type
38
Toy model conclusions
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.
39
40
Growth and distance from Brussels
41
Growth and distance from Brussels
growth since onset of reform
.03399
Fitted values
POL
SVN
HRV
CZE
HUN
SVK
ALB
EST
MKD
MNG
BLR
BGR
UZB
LVA
LTU
KAZ
ARM
ROM
RUS
KGZ
TKM
GEO
UKR
MDA
-.10982
AZE
448
TJK
4225
distance from Brussels (miles)
42
Growth and distance from Brussels
43
„Reform” and distance from Brussels
44
Voice and accountability and distance
from Brussels
45
Control of corruption and distance from
Brussels
46
Early conclusions
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….
47
Markets require non-market institutions
to work well
a. Markets are not self-creating
i. Property rights
ii. Contract enforcement
b. Markets are not self-regulating
i. Regulatory authorities
ii. Correction of market and coordination failures
c. Markets are not self-stabilizing
i. Monetary, fiscal and currency arrangements
d. Markets are not self-legitimating
i. Political democracy
ii. Social insurance
iii. Redistribution
48
The institutional basis for
market economies is not unique
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)
49
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. 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?
50
There is just about 64 standards….
Key Standards According to the Financial Stability Forum
Subject Area
Macroeconomic Policy
and Data Transparency
Monetary and financial
policy transparency
Fiscal policy transparency
Data dissemination
Institutional and Market
Infrastructure
Insolvency
Corporate governance
Accounting
Auditing
Payment and settlement
Market integrity
Key Standard
Issuing
Body
Code of Good Practices on Transparency in Monetary and
Financial Policies
Code of Good Practices in Fiscal Transparency
Special Data Dissemination Standard/
General Data Dissemination System
IMF
Principles of Corporate Governance
3
International Accounting Standards (IAS)
International Standards on Auditing (ISA)
Core Principles for Systemically Important Payment
Systems
The Forty Recommendations of the Financial Action Task
Force
Financial Regulation and
Supervision
Banking supervision
Core Principles for Effective Banking Supervision
Securities regulation
Objectives and Principles of Securities Regulation
Insurance supervision
Insurance Supervisory Principles
Source: FSF
IMF
IMF
World Bank
OECD
IASC
IFAC
CPSS
FATF
BCBS
IOSCO
IAIS
51
… and even if you comply…
South Korea
Peru
annual
reserves
social cost
foreign
in
"excess" of excess
reserves months reserves reserves
(mil $,
of
(% of
(% of
2000:I) imports
GDP)
GDP)*
83,581
7.0
0.12
0.70
9,041
12.2
0.12
0.72
* Assuming a 6% spread between the yield on foreign reserves and the
marginal cost of public borrowing.
52
… some costs…

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
53
Some illustrative trade-offs

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 deinstitutionalize 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?
54