1. Growth in the 1990s: Common lessons across sectors
Presentation to ICRIER
September 28, 2004
9/20/2018

2. Are there common lessons from the experiences of policy reform?
Macroeconomic
External policies
Privatization
Financial sector
9/20/2018

3. Three common lessons
Policy reform generally had the magnitude of impact expected—”growth” expectations were too high
Getting rid of discretion is too high a price to pay—but properly exercised discretion is difficult to achieve
Expectations are central
9/20/2018

4. Three implications for policy making
Common principles, heterogeneity of implementation
Focus on initiating and sustaining episodes of rapid growth
Pro-active actions of government have to be scaled to capacity
9/20/2018

5. “Growth” is nearly always a transitional phenomena, differences in “steady state” growth are small
9/20/2018

6. Micro-economists were generally right about direction and magnitude of the impact of policy reform: Trade
Most estimates of the impact of tariff reform are a few percent of GDP, with small associated “growth” impacts
The output gain increases with the square of the distortion
Discretionary restrictions (without effective secondary markets) can have huge losses
9/20/2018

7. What is to be done about discretion?
Diagnosis of the 1990s
Attempts to limit discretion in policy making
Lessons from the experience
9/20/2018

8. Diagnosis pre-1990s: Discretion is the problem
Inadequate information led to erroneous decisions,
Insufficient (and overstretched) technical capacity to take correct decisions,
Multiple objectives led to ineffective actions,
Policy actions were politicized in a way that led to sacrifice of effectiveness for political expediency (e.g. “populism”),
Inadequate incentives for public sector officials to be dynamic or to innovate.
Outright corruption
9/20/2018

9. The diagnostic pre-1990s: illustration with Central Banks
Rationale for public sector intervention
Symptoms of excessive discretion
Attempts to limit discretion
Regulate money supply, FEX
“printing money” to finance deficits
Independent Central Banks
Tied exchange rates (currency boards)
9/20/2018

10. Three ways to limit discretion of government
Move activities into the market (privatize, deregulate)
Pursue “rules based” regulation by “independent” or “autonomous” bodies
Enter into binding international agreements
9/20/2018

11. (The organizations or agencies legally authorized to take actions)
Feasible Policy
Actions
(The set of actions A that the policy making organization can take)
Citizen organizing capability
Background Institutions
Relevant “States of the World”
(empirically contingent “facts” that are relevant to the desirability of various policy actions--S)
Notional Policy
-Objectives with discretion
-Conditional rules
(A mapping from “states of the the world” to “policy actions” )
-Unconditional rules (always do policy action a).
Organization
(The organizations or agencies legally authorized to take actions)
Policy Actions
(The outcome of all of this is the actual sequence of decisions and policy actions taken)
Background Institutions of policy making
Administrative
Judicial
Political
(Executive, Legislative)
Impact of policy action on actions of relevant agents
Outcomes
Model
(description of how policy actions lead to outcomes M)
Free Press
Figure 7.2: The elements of policy action

12. Lessons from the “limit discretion” movement
With weak “background” institutions rules and discretion are identical
Eliminating discretion is like squeezing a balloon—it just changes shape
Both tied and untied hands have their dangers
9/20/2018

13. Key role of expectations
A “policy” is a sequence of future policy actions which depends on “states of the world”
Investors/entrepreneurs respond to expected profitability
Hence, anything can happen, depending on how current policy actions affect anticipated future actions
9/20/2018

14. Key role of expectations: Examples
Modest reforms can have enormous growth impacts—if they are the harbinger of future reforms
Enormous policy action changes can have no impact—if they are perceived as temporary
“Digging deeper” can have perverse impacts
With credibility the direction of effects can be reversed (e.g. Chile and deficits)
9/20/2018

15. Implication 1: Common principles, heterogeneity of implementation
“Institutions” cannot matter
“Institutions” are all important
Both are true
9/20/2018

16. Implication 2: Initiating and sustaining episodes of rapid growth
Growth is about confident belief that output will be much higher in the future
What current actions will convince investors (small, large) that output will be double in ten years?
9/20/2018

17. Implication 3: Actions have to be scaled to capacity
There are no arguments in principle in favor of limiting discretion of government
It all depends on the capacity to exercise discretion productively
Improving that capacity is central
If you don’t have it, you shouldn’t do it
9/20/2018

18. The wrong debates Is activist industrial policy good or bad?
Is free trade better than use of trade as an instrument?
Should country regulate banking or have public sector banks?
Should utilities be private or public?
9/20/2018