The Economics of Preconditions Changing Perspectives on Development Célestin Monga The World Bank Hanoi, Vietnam, June 29, 2014
Outline 1. Prelude: background 2. Traditional formula for prosperity 3. Some lessons from history and experience 4. Beating the odds: a different perspective
1. Prelude: background Oxford Handbook of Africa and Economics Objectives Support from UNU-Wider, the AfDB, the WBG, Peking University A project that cannot be summarized 2 volumes, 93 chapters, 720,000 words, 143 contributors/wide variety of views T. Addison, E. Akeampong, E. Aryeetey, A. Basu & K. Basu, A. Berg, J.- C. Berthelemy, H. Bhorat, A. Bigsten, F. Bourguignon, H.-J. Chang, P. Collier, J. de Melo, A. Demirguc-Kunt, I. Elbadawi, A. Fosu, A. Gelb, S. Golub, J. W. Gunning, M. Jerven, C. Juma, D. Leipziger, P. Masson, A. Mbaye, M. McMillan, R. Myerson, M. Nabli, M. Ncube, B. Ndulu, Y. Nyarko, J. Page, C. Pattillo, J.-P. Platteau, S. O Connell, V. Ramachandran, J. Sachs, J. Stiglitz, F. Tarp, N. van de Walle, T. Yousef This presentation is just one small theme among many takeaways
2. Traditional recipe for prosperity A well-known formula Economic Prosperity Macro Stabilization Structural and Institutions Reforms
Fiscal Discipline Tax reform The typical policy prescription: why can t we read this table? Policy Recommendations Reordering Public Expenditure Priorities Restrictive monetary policy A Competitive Exchange Rate Liberalizing Interest Rates Liberalizing the financial sector Liberalization of Inward Foreign Direct Investment Trade Liberalization Privatization Public sector reform Deregulation Protecting Property Rights Liberalizing labor markets Human capital Improve the Business Environment Improve Governance Sectoral Reforms and Strategies of various kinds (agriculture, electricity, water, telecommunications, etc.) Macro Stabilization Justification To curb large deficits that led to balance of payments crises and high inflation To construct a tax system that combines a broad tax base with moderate marginal tax rates To switch expenditure in a pro-poor way, from things like indiscriminate subsidies to basic health and education To keep inflation in check and gain credibility To mitigate external shocks and limit balance of payments deficits Structural and Institutional Reforms To end financial repression and capital flight To end financial repression and improve intermediation To attract foreign savings and stimulate knowledge transfers To eliminate distortions and stimulate competitive exports To eliminate distortions, alleviate the cost of poorly-managed public enterprises on public finance, and encourage competition To alleviate the burden of the public administration on public finance and make it more consistent with the needs of a modern economy To ease barriers to entry and exit and establish a level playing field among firms To provide the informal sector with the ability to gain property rights at acceptable cost To provide the flexibility that firms need to be able to hire and fire workers To provide the public sector and private sector firms the skills base needed for development To remove all binding constraints to growth, build infrastructure, and stimulate private sector development To strengthen administrative institutions, fight corruption and rent-seeking, and create a transparent public sector To set objectives that are consistent with the medium-term budget framework and the long-term development goals
3. Some lessons from history and experience Who is Corrupt? Us versus Them? Do preconditions really matter? (1) Institutions
Who is Corrupt? Digging Deeper Corruption Perceptions Index 2012 (TI) 1 st 19 th Denmark USA 144 th 139 th Cameroon Kenya
Digging Deeper: Are we missing something? Corruption Perceptions Index 2012 (TI) 80 th 123 th China Vietnam 69 th 58 th Brazil Namibia
Puzzling! The Top 30 Fastest-Growing Economies in the World, 1992-2012 Control of Corruption: Estimated Score from the WGI project Economy Average GDP Growth Rate (in real terms) Control of Corruption Estimated Score for 2012 (score range: [-2.5, 2.5]) Ranking Control of Corruption in 2012 Equatorial Guinea 19.2-1.560085255 209 China 10.9-0.479073297 128 Bosnia and H. 10.8-0.295258322 107 Liberia 10.4-0.572920228 139 Cabo Verde 9.3 0.805703921 55 Macao SAR, China 8.9 0.449983828 64 Bhutan 7.8 0.823781825 48 Qatar 7.6 1.188926581 35 Vietnam 7.4-0.556690187 136 Cambodia 7.4-1.044015514 180 Lao PDR 7.3-1.040884898 179 Uganda 7.2-0.952185531 173 Mozambique 7.2-0.589683048 141 India 7.1-0.565264835 137 Angola 7.0-1.294966715 200 Ethiopia 6.9-0.604427096 144 Chad 6.8-1.250439897 198 Rwanda 6.5 0.655002436 58 Singapore 6.5 2.153674165 7 Panama 6.3-0.385142527 118 Myanmar 6.2-1.115515598 186 Dominican Republic 6.1-0.83285887 162 Malaysia 6.0 0.299848067 73 Ghana 6.0-0.086503059 94 Jordan 5.9 0.069474877 83 Burkina Faso 5.9-0.519267661 130 Kuwait 5.9-0.16094733 99 Bangladesh 5.8-0.86536479 166
The Algebra of Mystery: Solving the Puzzle Per Capita GNI and WGI in a Sample of Countries, 2010-2 -1 0 1 2 0 20000 40000 60000 80000 GNI per capita (Atlas Method, Current US$)
Economic Performance and Quality of Governance, 2010 Correlation Coefficients for 3 different years Correlation Coefficient with GNI per capita (2010) Correlation Coefficient with GNI per capita (2002) Correlation Coefficient with GNI per capita (1996) Rule of Law 0.7853* 0.7524* 0.7247* Control of Corruption 0.7966* 0.7977* 0.7335* Voice and Accountability 0.6339* 0.5384* 0.5618* Political Stability and Absence of Violence 0.4972* 0.5709* 0.5340* Government Effectiveness 0.8003* 0.7852* 0.7533* Regulatory Quality 0.7491* 0.7287* 0.6698* Number of Observations 172 172 172
1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Do preconditions really matter? (2) Physical capital 9000 1979: China only had 2,874 km of railways. Less than Zimbabwe, Mozambique, Uruguay today Compare with India s 64,500 km in 2013 and Russia s 128,000 km in 2012 8000 7000 6000 5000 4000 3000 2000 1000 0 China: Real GDP per Capita (1990 International Geary-Khamis dollars)
1870 1874 1878 1882 1886 1890 1894 1898 1902 1906 1910 1914 1918 1922 1926 1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 8000 7000 Do preconditions really matter? (3) Human capital 1968: Average years of schooling: about 2 1993: Average years of schooling: about 4 (lower : than Cuba or Ghana) 6000 5000 4000 3000 2000 1000 0 Brazil: Real GDP per Capita (1990 International Geary-Khamis dollars)
China: did not meet any precondition on human capital China 0 20 40 60 80 1950 1970 1990 2010 Year Any college (%) High school or more (%).05.1.15.2.25.3 0 20 40 60 80 High school or more (%) Source: Paxson (2013)
Do preconditions really matter? (3) Human capital Italy: Average Years of Schooling and GDP Per Capita, 1870-2010
Do preconditions really matter? (3) Human capital Average Years of Schooling (25 years and older), 1980 and 2012 1980 2012 United States 11.9 13.3 Poland 7.7 11.6 France 6 11.9 Italy 6.1 11.7 Spain 5 10.8 Portugal 4.8 10 Singapore 3.7 10 China 3.7 10.7 Vietnam 4.3 5.8 Brazil 2.6 8.3 Cuba 6.5 11.7 Ghana 3.6 5.6 https://data.undp.org/dataset/mean-years-of-schooling-of-adults-years-/m67k-vi5c
Do preconditions really matter? (4) Financial institutions Stock Market Capitalization and GDP Private Credit and GDP
Do preconditions really matter? (5) Investment climate variables Responses to surveys can be misleading 'Obstacle' Mean Reported Value Overall Bangladesh Nigeria Singapore Taxes and Regulation 2.97 3.03 3.10 1.55 Political Instability 2.83 3.08 3.43 1.50 Inflation 2.83 2.86 3.21 1.61 Financing 2.81 2.60 3.11 1.97 Exchange Rate 2.59 3.09 2.92 1.88 Street Crime 2.54 3.07 3.30 1.22 Corruption 2.54 3.61 3.37 1.28 Anti-Competitive Behavior 2.39 2.40 1.58 Infrastructure 2.27 3.68 1.42 Judicial Efficiency 2.16 2.38 1.32 Obstacles to firm growth reported by over 6000 firms in 80 countries. Reported value between 1 and 4, where 1 indicates no obstacle and 4 indicates major obstacle. Source: Ayyagari, Demirguc-Kunt, and Maksimovic (2005)
Managers often get it wrong when reporting on preconditions! Obstacle Investment Climate Variables: Estimated Impact on Firm Growth Estimated Economic Impact Overall Bangladesh Nigeria Singapore Financing -0.101** -0.094** -0.112** -0.070** Street Crime -0.096** -0.117** -0.125** -0.046** Political Instability -0.074** -0.080** -0.089** -0.039** Inflation -0.031-0.031-0.035-0.018 Judicial Efficiency -0.011-0.012-0.007 Taxes and Regulation -0.006-0.006-0.006-0.003 Corruption 0.013 0.018 0.017 0.006 Infrastructure 0.018 0.029 0.011 Exchange Rate 0.041 0.049 0.047 0.030 Anti-Competitive Behavior 0.043 0.043 0.028 Estimated Economic Impact is the effect on Firm Growth of a change in the Obstacle by its relevant (overall or country-specific) sample mean. Source: Ayyagari, Demirguc-Kunt, and Maksimovic (2005)
The trouble with traditional approaches and preconditions Wrong reference (model-economy) Extraverted intellectual focus Obsessive search for the missing elements open-ended exercise Large number of binding constraints and policy frameworks as laundry lists Limited resources and administrative capacity stretched too thin Political feasibility considerations and issues of political timing
4. Beating the odds: New perspectives Good prospects ahead: GVC as game changers Reducing supply chain barriers (Scenario B) could increase global GDP up to 6 times more than removing all import tariffs (Scenario A) Scenario B Scenario A 400 1100 1600 2700 0 500 1000 1500 2000 2500 3000 Increase in Global Exports Increase in Global GDP
Employment levels: there are opportunities out there for LICs China Source: Haraguchi (2014) 22
Tanzania s example: Not everything everywhere is critical! 7/1/2014 23 Source: Dinh and Monga (2013)
Summing up: a few (random) thoughts Focusing on existing conditions and making the most of them complete change of perspective: no ideal world Using limited state resources strategically and wisely Selecting areas of focus: More strategically-targeted infrastructure and institutional settings Roles of various levels of government Rules of the game (transparency, time-limits, collective action, etc.) Pragmatic government interventions to overcome issues of coordination and externalities, which no individual firm can address alone effectively. Importance of quick wins/political economy considerations Focus development thinking on jobs and productivity growth Encourage learning not only within firms but also among firms Proactive strategies to attract FDI and develop manufacturing Encouraging trade through clustering (industrial parks with forward and backward linkages to the national economy; role for development banks with transparent rules and competent staff).