10 October 2005
Successful National Growth Strategies Require Experimentation, Unconventional Solutions, Keynote Speaker Says in Address to Second Committee
Best-Practices Approach Could Be Harmful to Shaping of Policy, He Says
NEW YORK, 7 October (UN Headquarters) -- Successful national growth strategies required policy experimentation and unconventional solutions, while multilateral organizations must de-emphasize the so-called best practices approach, which could be harmful to the shaping of policy, a Harvard professor told the Second Committee (Economic and Financial) in a keynote address this morning.
Speaking on the topic "In search of prosperity: a view on national growth strategies", Dani Rodrik of Harvard's John F. Kennedy School of Government said that current thinking about economic growth had begun to depart from the two-decade old "Washington Consensus" that came out of the United States and Western Europe and was being replaced by an emerging new philosophy.
He said the Washington Consensus had long advocated three key policies for the achievement of economic development, regardless of a country's circumstances: economic liberalization, the creation of a stable macroeconomic environment marked by low inflation, and increased privatization. That approach had later grown to include such other recommendations as improving corporate and financial governance, instituting anti-corruption measures and prudent financial regulations, creating flexible labour markets, and adhering to World Trade Organization (WTO) agreements, among others, which formed the "augmented Washington Consensus".
By contrast, the new mode of thinking, reflected in the Monterrey Consensus, was still diffuse, he said. Nevertheless, consensus was beginning to grow around the alternative conclusions that across-the-board policy recommendations were not necessarily appropriate in all situations, and that institutions, rather than strict adherence to externally prescribed policies, were central to achieving economic growth. Support for the Washington Consensus had dissipated in the face of historic evidence pointing to their limited benefit. Latin America, a region known to have embraced development policies along Washington Consensus lines, had exhibited disappointing economic growth compared to that of the Asian economies emerging over the last four decades.
He said countries like China, India and Viet Nam, among others, had adopted policies that leaned towards trade protection, in apparent divergence from the Washington Consensus. Over time, those policies had resulted in an increased volume of exports and foreign investments, as well as a considerable reduction in poverty. Notably, protectionism had not prevented those countries from integrating into the world economy; in fact, they would later go on to reduce trade barriers significantly as their economies grew.
Citing a World Bank report in trying to identify policy instruments to achieve expanded growth, investment and poverty reduction, he said that no single formula should be applied. Rather, the manner in which policies were formulated, or the institutional setting from which they emerged, may be more important. Technocratic approaches -- four or five economists sitting around a table -- could be harmful because they may cut short the process, which should consist of discussion, elaboration and exchanges of information about preferences and opportunities.
He stressed three main components for growth strategies: growth diagnostics, policy design, and institutionalization. Growth diagnostics should be the first exercise to determine the most binding constraints on economic growth, and to make decisions about the most productive interventions in the short term. Investors in Brazil, for example, had many ideas for investment, but were thwarted by high interest rates in obtaining capital. El Salvador had the opposite problem -- low interest rates, but few profitable investment opportunities. In such cases, it was necessary to determine the underlying reasons for the constraint. In El Salvador's case, some sort of industrial policy was needed to kick-start investment in non-traditional areas, while Brazil, which possessed inadequate savings in relation to investment opportunities, required greater domestic savings and enhanced access to foreign savings.
The second element -- policy design -- was needed in order to best alleviate constraints, using some creativity instead of generally accepted blueprints, he said. Rather than liberalize farming in China, for example, which would have led to a collapse of the tax system, farmers had been told to deliver their produce at controlled Government prices to meet their quotas, but they were then free to sell at market prices. That policy had achieved the desired efficiency while providing farmers with the incentive to produce without wreaking the havoc in public finances that across-the-board liberalization would have created.
Finally, the diagnostic/policy design process must be institutionalized because binding constraints would change over time as new ones emerged, he said. The challenge of sustaining economic growth -- which required ongoing institutional reform -- would be quite different from that of initiating economic growth. For example, even if education was not an initial restraint, it could become one once the economy expanded and new skills were required. Constant reform was also needed to thwart one of the frequent causes of growth collapse -- unexpected shocks due to altered terms of trade, reversal of capital flows or political crisis, for example. Moreover, policy space should be a large part of discussions. Current WTO rules on subsidies and intellectual property rights actually prohibited policies from which successful countries like China, Viet Nam and India had benefited.
Responding to a query about experimentation and investment, he said investors were more likely to invest in a country with a pragmatic Government, rather than one that was wedded to a particular take on which policies worked.
On a related point, he acknowledged that while the Washington Consensus was still influential in some parts, external agencies were likely to concede to those countries presenting an alternative view, provided that their policies were coherent.
Questioned about his expectations for the Doha Round, he said the best outcome would be for participating countries to politely agree to disagree, and to understand that talks could only go so far this time around. The talks should not even be called a development round, because agricultural liberalization, the focus of the negotiations, was not a development issue and its benefits for developing countries were vastly overemphasized.
Regarding good governance and transparency, he said such principles should be viewed as development goals alongside economic growth. Good governance, however, should not be considered a precondition for economic growth. Conditions in the late nineteenth-century United States were marked by corruption, which later decreased.
In his opening remarks, Committee Chairman Aminu Bashir Wali (Nigeria) said it was increasingly recognized that economic growth did not automatically translate into prosperity and that accompanying national policies and institutions were also critical.
The Second Committee will meet again at 10 a.m. on Monday, 10 October, to begin its consideration of macroeconomic policy questions.
* *** *