Emerging markets, not the US consumer, have been the leaders of this global recovery. This is a major reversal from 10 years ago when many emerging markets were still coming out of the Asian crisis slump. Failures in Latin America and Turkey occurred less than ten years ago. Credit ratings are generally increasing in some emerging market and growth both internally and through trade is picking up. There is a new economic growth story, but it is not clear that is related to any one size fits all policy choices.
Dani Rodrik in One Economics Many Recipes: Globalization, Institutions and Economic Growth provides a good framework on why growth has occurred across some countries and not others. Latin America has been a laggard relative to Asia but even here the engine has been picking up. His hypothesis is that growth is fragil and related to unique set of factors and not single set of policy choices. Growth is a function of the unique institutional setting and any set of polices may not be transferable across countries. While growth economics have been focused on some of the poorest countries, the lessons of this work can be applied to all of the emerging markets and may also be applicable to the developed markets.
The growth story for the last two plus decades has been driven by what has been called the Washington Consensus, yet his consensus of policies has not translated into good growth across all the countries that have tried it. Yes, neoclassical principals such as incentives, property rights, and cost benefit analysis are all helpful, but the mapping between principals and institutional arrangements is obscure and a unction of the cultural setting o the country. There is no one size fits all set of policies.
Original Washington Consensus
the previous
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
“Augmented” Washington Consensus
the previous 10 items, plus:
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
Rodnik presents some strong empirical conclusions concerning growth:
Growth spurts are associated with a narrow range of policy reforms. In some cases, it doe not take that much to see growth increases.
Policy reforms typically combine elements of orthodoxy and unorthodox institutional practices. There has to be a grounding of policies in basic laws of economics, but innovation in policies or policies that fit the specifics of a country can be extremely useful.
Innovation in one country does not translate well to other countries. One approach around the globe will not work. Policy design has to be tailored to a country. The Asian miracle does not translate well to Latin America where unique policies have to be employed.
Sustaining of growth is difficult and requires more extensive reforms in any economy. The infrastructure for growth matters. A policy change that ignites growth needs reform to allow the growth to pass through to multiple industries.
US, UN, IMF or World Bank policies applied across countries whether for trade or finance will not have the intended effects. The developed world has to set principals of what is desired and then allow countries to experiment. For example, if trade is to be increased there may be policies within a country which will not be acceptable for developed countries.
There may be strident view of what is acceptable trade policy, but it may be more important to allow flexibility across countries. The objective is to promote and sustain growth not promote a single set of policies.
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