"Rethinking Growth Policies in the Developing World:" Comments 8

By Lourdes Agnes K. Roncesvalles (Philippines)

Introduction

The article seeks to answer the question “what should developing countries do to increase their growth rates and speed up the rates at which their citizens converge to the level of material well-being obtained in today’s advanced nations?”

It discusses the Washington Consensus as an instrument, which Washington including the International Monetary Fund, among others, urged developing countries to adopt during the 1980’s as against the heterodox policies most developing Asian countries implemented. Further, it continues to show that the Washington Consensus may still be applied in developing policies if certain adjustments as explained through its augmented version are also achieved.

In the end, the author recognizes that there is no “one-size fits all” solution to economic development and thus presents a diagnostic approach to growth strategies wherein main bottlenecks to development are isolated and analyzed to determine strategic solutions. This methodology allows a government to address its weak points while giving it enough flexibility to address the latter strategically and within its capacities.

Comments

Washington Consensus vs. Heterodox Policies

The three main ideas around the Washington Consensus are macroeconomic discipline, a market economy, and openness to the world.[i] These concepts are probably derived from the neoclassical economic point of view. On the other hand, heterodox policies, adopted in most Asian countries, took on a more developmental strategy wherein their individual governments had more control over implementation of strategies.

Based on the Latin American cases, which adopted the Washington Consensus as an ideology and their failures vis-à-vis the apparent gains of the Asian countries that have “marched to their own drum,” it can be concluded that a single formula to development is not a solution to achieving development.

Boxing up such policies and assuming they could induce growth in all developing countries is therefore not a wise presumption. Factors such as political, social, cultural, as well as investor confidence, growth drivers, etc. of each country greatly affect development. Thus adoption of a certain policy that may have been effective for one country may not have the same results in another.

Saying that “no one size fits all” is a cliché. However, there is also an obvious truth to it. Strategies should be tailor fit to the implementers’ capacities as well as the society’s ability to adhere to the policies.

The recommended diagnostic approach would indeed allow developing countries determine strategies applicable to them. However, a vital step is not discussed in this strategy. This step refers to the determination of the main bottleneck. Many developing countries are faced with multiple impediments to growth. And for them to break out from this level, they have to address all of these within the limits of their financial, technical and physical capacities. As such, a prioritization process should be included as well.

Significance to the Philippine Case

The Philippines unlike its Asian counterparts has basically followed the Washington Consensus path since the 1980’s. Thus, I would like to highlight the effects of the three core recommendations of the Washington Consensus, i.e., to stabilize, liberalize and privatize on the country’s economy within the last two decades.

Stabilization

1) Government spending was reduced, as the focus was to balance the budget and pay for outstanding foreign debt this resulted in poor allocation of investments. As opposed to neighboring Asian countries where the government has been actively participating and investing in capital development, the Philippine government has not kept at pace in such investments.

Liberalization

1) From import substitution to export oriented – While foreign direct investments increased and improvements in some sectors such as the electronics industry, they overall process did not deliver the expected benefits to the manufacturing sector. This failure led to high unemployment rates as the manufacturing sector could not absorb the continuously growing labor market. As a result, employment generally shifted to the services sector. Productivity in the manufacturing sector thus remained low.

2) Agriculture – Unlike Japan, which is strongly protecting its agriculture sector, liberalization created problems for the agriculture sector. Farmers were, and still are, finding it hard to compete with imported products such as rice from Thailand and Vietnam due to a few main reasons. First is the high transportation costs within the country. Due to inefficiencies of the government in developing much needed railway systems, for example, that can cut transportation time and cost of products from both northern and southern regions has been slow. Furthermore, the agrarian reform act, which was intended to alleviate rural farmers from poverty, resulted in problems of economies of scale which further constrained farmers from competing with imported agricultural products.

Privatization

1) Privatization has been pursued since the political crisis of 1986. Since then the government has engaged in various privatization efforts, including the power, water supply and transportation sectors. However, initial attempts to privatize were maligned with various cases of corruption. At the same time, the government itself was not adapt to private sector mind sets thus would create misunderstandings during contract negotiations. This lack of capacity also resulted in unfair contractual obligations for the government, as in the case of the Metro Rail Transit Line 3 Project, giving the general public a negative perception of public-private partnerships. Despite this, the government continued its privatization policy in transportation, watery supply, power, and communications. Metro Manila’s water supply and sewerage system can now be said to have improved due to the privatization of the Metropolitan Waterworks and Sewerage System. The North Luzon Expressway and the Subic-Clark Tarlac Expressways are also examples of good privatization projects.

Conclusion

The Washington Consensus, in my opinion, is a generalization based on the western values and experience in development hinged on their belief in democracy. Furthermore it can be related to the neoclassical economic thinking wherein markets are left to develop on their own, thus promotes liberalization and privatization.

However, what the economists then forgot to consider is the value set of other developing countries, especially that of Asia. Heterodox policies are only “heterodoxical” from the western perspective. This may be what is normal or required for development in Asia given our nature or culture.

Furthermore, in light of the already globalized nature of trade, absolute liberalization may not be recommended as internal/local industries may not be able to catch up with the already competitive market thus instead of expanding could eventually die out as what happened in the Philippine case. It was therefore wise of both China and Vietnam to adopt partial liberalization. In the end, they were both able to participate in the world market as well as protect some of their industries.

As for the Philippine case, adopting the Washington Consensus had both positive and negative effects, albeit, in my opinion, more negative. By trying to stabilize the economy, the government was not able to utilize its capital to spur investments and, thus failed stimulate the economy especially during crises.

Liberalization, on the other hand, led to the Philippines dependence on both import and foreign capital, which led to fluctuations of growth and recession over the years.

Among the three recommendations, only privatization has thus far offered development in the sectors of transportation, water supply, telecommunications and power, if you do not consider the amount of “corruption” that came along with it.

At this point, the Philippines is still facing many obstacles to development. Economists, developers and planners alike have, in one way or another, utilized the diagnostics approach, however, the difficulty lies in determining which of these problems is to be prioritized. Given the very democratic nature of Philippine Government decision-making, policies end up as wish lists that try to address everything at the same time. In the end, targets are not achieved, as manpower and budget would always come up short of the requirements.

References:

1. The Washington Consensus as Policy Prescription for Development; John Williamson; Institute for International Economics; 2004.

2. Did the Washington Consensus Fail?, John Williamson, Peterson Institute for International Economics; Outline of speech at the Center for Strategic & International Studies; Washington, DC; 06 November 2002.

3. “External Liberalization, Growth and Distribution in the Philippines;” Joseph Y. Lim and Carlos C. Bautista; A paper for the international conference on “External Liberalization, Growth, Development and Social Policy;” Hanoi, Vietnam; 18 to 20 January 2002.

4. In the Shadow of Debt: The Sad but True Tale behind a Quarter Century of Stagnation; Walden Bello.

5. An Assessment of the Philippine Economy; Germelino M. Bautista; 2003.

6. Chapter 15: Privatization in the Philippines; Lauro A. Ortile; Challenges and Opportunities in Energy.

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[i] Did the Washington Consensus Fail?; John Williamson, Peterson Institute for International Economics; Outline of speech at the Center for Strategic & International Studies; Washington, DC; 06 November 2002

"Rethinking Growth Policies in the Developing World:" Comments 7

By Shah Mohammad Mahboob (Bangladesh)

Introduction

The article by Dani Rodrik has tried to focus upon the weaknesses of “one for all” reform strategies of the IFIs and the arguments can fairly be supported by a range of data. But, the developing countries “poor ability to decide and choose” can also be a major factor for the failure of reforms.

Historically, Bangladesh had been moderately submissive to the so called “prescriptions” from the IFIs, especially the World Bank and IMF. The country has taken a series of reforms and the results have not been very prosperous so far. It seems that, it was more of poor adoption of reforms than the features of reforms themselves, to make the situation worse.

Economic Policy Reforms

During the 1990s, Bangladesh’s structural adjustments started with privatization of public enterprises and opening of its markets through trade liberalization. Although the privatized enterprises started to make profit under private ownership at no time, they also created unemployment in the name of ‘right sizing’. Trade liberalization increased international trading, but imports surpassed exports by many times. This has given a rise in numbers of trading houses instead of manufacturers to eat out foreign reserves and also could not create employments. The domestic industries were kept insecure against import by withdrawing required tariff protection. Very shortly, government lost control of the prices of the commodities and an irregular trend of price hikes gave result to price inflation. These indicate the weaknesses of the policy makers in ‘customizing’ and taking right decisions. A recent survey has shown that, around 70% senior government officials have difficulties in understanding donor’s documents and 80.33% of them believe that lack of political commitment is giving the donors superiority over the government.

Development Policy Reforms

During 2000 onwards, Bangladesh started to prepare its “Poverty Reduction Strategy Paper (PRSP)” by replacing traditional “Five Year Plans” in response to one of the Augmented Washington Consensus. Although the donors in the name of ‘Local Consultative Groups’ was in supporting role, it was mainly the local consultants who helped the government to prepare the PRSP. Later it came to realization that, most of the government officers could not understand the document’s function, private sector mostly kept their silence and the common people never knew about it. As the ultimate result the document was hardly utilized and the country had been practically running without any plans. The case might be similar for many developing countries. It was a big blow that may require many years to recover. Including the PRSP into the traditional Five Year Plan could save the face. But the policy makers are yet to take any decision regarding this.

Importance of Specialization

China and India have followed heterodoxy ideologies for their taking off. Both the countries are well known for their scrutiny and general reluctance to donors. Sincere analysis, thinking and leadership from the government supported this idea. In addition, both the countries had some creative “specialization” which helped their stances. China has specialized on cost cutting and thereby increasing export whereas keeping a control over import. On the other hand, India had a ‘Made in India’ campaign among the citizens to prefer domestic products over the imported one. Being the second biggest market in the world, their production easily achieved the required selling target. Their customization of reforms helped their purposes. So, the developing countries really have to think of some specialization to boost the country power.

Conclusion

Even though IFIs were partly wrong in their drafting one unique plan for all countries, it was also the developing country’s primary responsibility to check the adaptability of the reforms to their situation and control the degree of implementation. If the countries cannot develop their own decision making ability, the ‘removing the bottleneck’ procedure, as was suggested by the author may as well be unsuccessful for them. They really have to learn to choose the best for them from a complex mesh of options.

"Rethinking Growth Policies in the Developing World:" Comments 6

By Farrah Shameen binti Mohamad Ashray (Malaysia)

I. Commentary

The rate of development of each country definitely lies in the growth policies adopted. How these policies are adopted and what are the reasons behind choosing each policy has a lot to do with the interest and aim of the nation as well as the regional trends. Although nations rely on each other because of trade activities, but they are not permanent friends as nations have different interests and aims which sometimes are conflicting.

The obsession to have super rapid growth has been the trend in developing countries. Gradualism is not it. At the same time, economic super powers through international organizations led by them are also propagating globalization, free-market and deregulation, indicating to the developing countries, since having a reliance on the foreign investment and capital, must govern and mold their countries in the desirable manner of the investors.

The question is who determines the best growth policy now? Who determines what is orthodox and what is heterodox? Are the growth policies propagated by the international communities, which are usually the already developed nations the best recipe for the developing nations? In my opinion, these are the issues brought forward by the author, Dani Rodrik. After discussing the basic principles of economic policies that all successful nations adhered to such as sound monetary policy, integration with the world economy, protection of intellectual property, social and political stability amongst others, he has highlighted that there are instances in certain countries which are not so. There are countries that have succeeded to attract investors and achieve considerable healthy economic growth without adhering to these set of principles such as China and Vietnam. The reluctant reformers and pro-socialist countries have also achieved growth which also proved that economic growth does not necessarily have to be in a democratic environment. He thereby concluded that the consensus on these principles through the Original Washington Consensus (OWC), and which was later enhanced in the Augmented Washington Consensus (AWC) are not necessarily the best medicine for all. The weaknesses highlighted by the author in the AWC such as being too ambitious to be achieved, not realistic enough compared to the institutional and human resource capacity in developing countries, are real and eminent in my point of view.

Then a realization that there is a need to avoid one-size –fits-all strategies and put focus on country-specific strategies. It is also admitted that the World Bank and other International Financial Institutions (IFI) recognize these issues but have yet to be confronted it seriously and are still positively proceeding with the current programs. Finding out why it has not been addressed seriously by these institutions would be interesting.

The Diagnostic Approach which is favored by the author is to match policy priorities with the diagnostic signals. It is a strategy to first figure out the bottleneck or the constraint of growth and then finding out what are the causes/roots of the particular constraint and connects it to the problem. At the same time, decide what the most needed thing/action to take is. It would also be easier to rule list out the strength in the beginning so that it could be used rather than reinventing the wheel or to avoid creating growth policies which do not take advantage of strong aspects/characteristics of a situation or nation. This approach shows that individualism and specifics are important in creating the skill to identify problems objectively and the skill in solving problems without relying fully on packaged remedies like the Washington Consensus.

II. The Case of Malaysia : The Industrial Policy

What kind of growth policies have Malaysia adopted to achieve growth over the years? How did Malaysia choose its growth policies and what are the reasons behind it. I would like to focus only during the early days of Malaysia, when huge transformations/policies of high impact to achieve several aims were made, which is the Industrial Policy.

Malaysia, in my opinion started from an agrarian state with an economy depending at about 25% share of agriculture in its GDP in 1960s but moved to set it priorities to become an industrialized state because of the constant identification of economic progress with industrialization, looking at the Industrial Revolution in the 18th century. This is probably the only economic revolution to date for the Third World countries to imitate and which could give a spill effect so large that it could be a fast track growth policy. It was probably the only way for Malaysia which was not satisfied with status quo and wanted a leap frog in economic growth. This strong orientation to be industrialized could also be seen when the 4th Prime Minister, Mahathir Mohamad announced in 1982 that Malaysia wanted to learn from the industrialized eastern countries, Japan, South Korea and Taiwan, a policy later called the Look East Policy, instead of from the western bloc. The other reason was Japan as the second largest trading partner to Malaysia at that time has emerged as the second largest economy in the world. Industrialization was also to diversify the economy because focused economy especially on agriculture, minerals and commodities is believed to be dangerous for the economic stability in the future.

Malaysia even before independence in 1957 has already traded actively mostly by exporting commodities, supplying raw materials for manufacturing industry of Britain and becoming the market for those manufactured goods. After the Investment Incentives Act was passed in 1968 in the midst of high unemployment and social instability, the law boosted private investment, local and foreign as well as export oriented industry by providing various incentives, exemptions on tax and tariff protection . It also provided labour intensive industries tax relief based on number of employees. At this time, government regulations played an important role in the pattern of employment as well as the growth of the industries. Export oriented industries mushroom so rapidly that in the early 1980s, that some industry like the construction and plantations were having shortage of man power as many have turned to factories and industries for employment. Government of Malaysia launched the Industrial Master Plan (IMP) in 1986 to lay the foundation for the manufacturing sector to be leading growth sector in the economy. At this point of time, the unemployment rate was doing downhill; the world recession starting in 1983 causing commodities prices to fall had resulted in massive retrenchment in many industries especially invested by foreign capital. To date, Malaysia has three IMPs namely the first: IMP1 (1986-1995), second IMP2 (1996-2005), and third, IMP3 (2006-2020).

Why was Industrialization chosen to boost economic growth even now? In reference to the Washington Consensus, it can be seen that the Malaysian Government did follow the rules of good behaviour such as openness to direct foreign investment, deregulation, tax reform, integration with world economy etc. The difference between Malaysia and some other countries like the Indonesia and Philippines is that Malaysia still has it freedom from the IMF and World Bank to make policies and regulations. Thus probably the pressure to follow these principles did not come out of obligation to these IFIs but came out of careful policy considerations and of the need to resolve the issues of financial weaknesses and inefficient banking system as well as to insulate the country from rapid capital flight. In other words, wanting to prove that Malaysia has strong and sound corporate governance. However, how did Malaysia come to that conclusion that industrialization is the best? Although it can be seen that Malaysia tried to mimic the success of the Industrial Revolution, there are many country specific characteristics which were adopted to tailor make the policy into the domestic environment. In the beginning of industrialization also, it can be seen that gradualism and government control was practiced very strictly. Gradualism was practiced in the beginning as the Government was cautious of losing control and being taken advantage of by investors whom are far more experienced. Some regulations made by the government because of national interests and economic distribution motives in mind have been largely criticized. Lastly, the industrial policy adaptation has a futuristic dimension that is to prepare the country to be competitive in the world and not only to address problems at the particular time.

3. Conclusion

In the case of Malaysia, all the first-order principles of economic policy are in existence. Malaysia wanted to grow very fast and needed to grow fast. For that the government has chosen industrialization as the key sector of economic growth through encouraging spill effects of industrialization which are:

1. Urbanization and migration;
2. the development of small and medium industries and enterprises (creating supply linkages);
3. increase of job opportunities through encouragement of labour intensive industries ( which leads into increase of income per capita);
4. Encouraging Science and Technology in education and job/skill training (creating a good/quality pool of labour);
5. Poverty eradication and income distribution (increase quality of life);
6. Foreign investment and capital increases and etc.

To my opinion, it is seen like Malaysia did diagnose the bottlenecks and constraints in the growth of the economy before bravely pointing to industrialization as the key to economic growth, using the growth it generates to cover many bases at one time. The issue of misdiagnosed might be argued by some saying that the IMP has failed in many ways, but the Industrialization as a whole is a success although a handful business projects under its flagship such as HICOM and Perwaja Steel has failed to sustained due to many contested reasons.

"Rethinking Growth Policies in the Developing World:" Comments 5

By Paul J Amani (Tanzania)

1.0 Introduction

For decades, many poor countries of the world including Tanzania implemented a series of development reform policies mostly conditioned by International Financial Institutions (IMF and WB), with the aim of achieving economic growth and alleviate poverty. The emphasis of these policies changed over time depending on what economists believed to be the best course of action for the country(s) to achieve high and sustainable economic growth. Notwithstanding of all the efforts, Sub-Sahara African countries (including Tanzania) remains the poorest in the world. This paper therefore, discusses the impact of the growth policies by citing Tanzania’s experience. A major reference is made on Dan Roderick’s lecture at Havard University- “Rethinking Growth Policies in the Developing World”, 2004.

2.0 Summary of Rordick’s Lecture

In my understanding, I think the author is concerned with ongoing poor economic situation among poor countries particularly those in Sub-Saharan Africa despite decades of tying reforms policies in the pursuit of social, economic and political development. Without doubt, the founding pillar of these policies is the orthodox development thinking and theories; “stabilize, liberalize and privatize” of the advanced countries proposed as a cure for the economic destitution of the poor countries. Of all reforms trade liberalization has been pointed as the most striking policy as it required the developing countries to “eliminate restrictions on imported goods and services”. Despite the fact that many countries adopted the policies, only few succeeded. China, Vietnam and India for example, become successful through unorthodox means-by grafting market system on top of a planned system, underplayed private property rights, and opened trade to the world- in a highly protected trade regime with favors on special economic zones. He insists the importance of countries to protect their macro-economic activities, cautiously integrate into world trade, ensure effective property rights and maintain social cohesion, solidarity and political stability.

3.0 Tanzanias economic reform policy experience:

Soon after attained its independence in 1961, Tanzania nullified the role of market in the economy and backed socialistic political system with the state controlling everything. Towards the end 1970s and early 1980s the country suffered extensive economic decline and heavy financial crisis of which the major cause was said to be government’s poor economic policies and structural weaknesses (Wangwe et al, 1998).
To solve the problem, Tanzanian government approached IMF and the World Bank to seek loans and extend repayment period of both principal and interest. In return the country was compelled first to implement Structural Adjustment Program with the aim of stabilizing external and internal balance of payment, reduce fiscal deficits and promote export oriented production through devaluation, producer price changes, trade liberalization, privatization, and legal reform (Gibbon, 1993; 11). Other measures would include creation of conducive environment for foreign environment, abolish price controls and retrenchment. President Nyerere, rejected the program calling it “economic suicide” to the country. However, in 1986 there was no option, and the country opened the doors and signed agreement with IMF and World Bank to implement the Economic Recovery Program(s).

It is over two and a half decades since the economic recovery programs were implemented in Tanzania; the country’s economic situation did not improve much. While urban poverty is said to be decreasing, a great problem remains in the rural areas. The largest household survey ever conducted in Tanzania in 2000/2001, number of people living below basic need poverty line increased to 11.4million compared with 9.5million reported in 1990/1. Last years’ projections show the number has increased. As well privatization of public companies has substantially increased the unemployment rate, lowered wages, and increased the cost of goods and services and reduced access to the poor population in the country. For example, though 700,000 new job seekers join the labor market in Tanzania every year, only about 30,000 of them get employment. Today, privatization has increased the prices of fertilizer and other inputs, and reduced access to credit. While large scale farmers and private traders have benefited from liberalization and privatization, small farmers, who constitute the majority of Tanzania's population, have not enjoyed such benefits. Majority of people in the country have increasingly facing difficulties in accessing essential services, including water and sewerage, adequate shelter, electricity, education, health care and other basic services.

We cannot deny that lack of sound state backed policies especially on trade has brought some unusual effect to Tanzania. Internal productions and market of local goods and services has been suppressed due to large importation of cheap products from the developed countries. On the other side, it is important to ask ourselves, what could have been the country`s economic situation without the economic recovery programs? The country enjoys a higher degree of macroeconomic stability today as compared to the situation before 1986. Growth Domestic Product (GDP) growth per annum averaged 4.2 % in 1996, 6.7 in 2006 (http://www.imf.org/external/index.htm ) reversing the declined per capita income in the decade before. Again, despite setback in microeconomic policy during the first half of the 1990s the government achieved macroeconomic stability in the late 1990s. For example, inflation was reduced from about 30% in 1980 and early 1990 to 4.6% in 2002 when the fiscal imbalances were curbed by prudent fiscal management reducing government deficit below 13 percent of GDP. Acceleration of structural and institutional reforms as well as creation of new institutions led to improvement in the investment climate, increased foreign direct investment flow and job creation. The financial sector has been substantially transformed into highly diversified, competitive, and vibrant one. Whereas the financial sector was dominated by one publicly owned commercial bank and other few small financial units by the end of 1990’s, currently the sector comprises 22 private commercial banks of which 13 are foreign owned, 12 nonbank financial institutions, pension funds, 14 insurance companies, and more than 63 foreign exchange bureaus.

The balance of payments improved significantly, reflecting large donor inflow and increased export earnings from nontraditional exports mainly gold and diamond, gemstone and fish products. Overall gross foreign reserves rose from the equivalent of 1.6 months of export in 1995 to 6 months of export by December 2002. Tanzania is currently benefiting debt relief enhanced by Heavy Indebted Poor Countries (HIPC) initiatives which has have paved the way for additional donor inflow and increased budget expenditure allocation to social and other priority sectors such as roads, judiciary and HIV/AIDS.

Conclusion

For better and quick results, I think: One the economic policies should be changed to reflect the Tanzanian environment. Currently, they are highly conventional in the sense that they focused and reflect the economic growth of their countries of origin and hence difficult to be applied in a different environment. Two, the poor and inefficient physical and financial infrastructure in the country should be reinstate. Third, restrictions in forms of high tariffs should be imposed on the imported goods in order to promote domestic production of manufactured goods and hence reduce inflation. And fourth, poor, incompetent and corrupt officials in both public and private sectors who have been not only are incapable of formulating and implementing development projects should be replaced.

References
Dan Rodrick, “Rethinking Growth Policies in Developing World” , Lecture given at Havard University in October, 2004.

Ferreira, M. L. 1996. “Poverty and Inequality during Structural Adjustment in Rural Tanzania;” Policy Research Working Paper 1641, World Bank, Washington, D.C

Gibbon, P., 1993. Social Change and Economic Reform in Africa, Scandinavian Institute of African Studies. Uppsala, Sweden

Samwel W, 1998, "The Impact of Structural Adjustment Program in Tanzania," A Paper Presented in Ethiopia.

http://www.dagliano.unimi.it/media/finalEnglishprograme.pdf

http://www.povertymonitoring.go.tz/documents/HBS_2000_contents_of_summary.pdf

"Rethinking Growth Policies in the Developing World:" Comments 4

By Le Hieu Trung (Vietnam)

For more than 15 years, the consensus of opinion on which economic policies could boost growth in developing countries is presented. At that time, there was several concepts and theories of reform policies for developing countries. As far as the concept of reform policies is concerned, it was divided into 2 different groups, one of which was the group of countries following broadly similar strategies. This group was known as sequential reform, which was opposed to simultaneous reform. “Big bang”, the name of this other group of countries, was non-dogmatic in their approach to economic reform. Those countries were pragmatic, experimental and proceeded in a flexible and instrumentalist way. Professor Dani Rodrik of F. Kennedy School of Government, Harvard University, has written many articles and books on the areas of international economics, economic development, and political economy. In “Rethinking Growth Policies in the Developing countries”, Professor Rodrik wanted to evaluate the reason explaining the failure of some developing countries related to reform, while some other countries managed to reform well and achieved remarkable results. He stood on the idea of Washington Consensus that begun from some countries in North American, especially in Latin America and also from some countries in Asian and African, and compared with the other group to find out the more efficiency methodologies for reform policies.

Firstly, as mentioned in the article, nowadays, the Washington Consensus becomes very popular and is used constantly in government’s debated related to trade and development. It is often defined as synonymous with neo-liberalism and globalization. This concept focused mainly on trade liberalization and tax reform, As far as trade liberalization is concerned, it is the liberalization of inflows in foreign direct investment, privatization, and the insurance of property right. As the author mentioned in his article, the consensus does not perform as expected. The Latin America has to face with the low perspective of economic growth and it’s started to reach an even lower level than the period before the presence of the consensus. In order to solve this puzzle, Professor Rodik found the case of some other countries, where it started as under-developed countries. However, those countries applied the heterodox policies and they saw a growth rapidly over the same period. China, India and Vietnam could be the example for this case, where it had a high and sustainable economic growth from 1980. This growth is explained in this article as due to the main characteristics of those countries’ policies, which are developing based on market-oriented but somehow had their own unorthodox ways. Taking Vietnam as an example for a deeper review, liberalization of foreign trade and investment has been an important part of Vietnamese reform. The trade system was highly restricted through the mid-1980s. Reform has included dismantling of non-tariff barriers and tariff reductions. So it becomes more difficult to measure the effectiveness of trade policy reform. However, it could be based on the one good indicator, which is the volume of trade in constant prices relative to PPP GDP. This ratio increased from 0.08 in 1989 to 0.27 in 1997. Nowadays, world trade is closely related to foreign investment. Vietnam also liberalized its policies toward foreign investment. Flows of FDI averaged more than 5% of GDP in the second half of the 1990s, up from zero in the 1980s.

Secondly, the key to success of the group countries, which are using their own method to reform, is maintaining a stability for their macro-economic and an integration in the world economy. However, they still need to keep a good protection for their domestic products against import. On the other hand, they have to enhance a deeper and wider cooperation with the world trade regime. Another important point is the provision of effective protection to investors in terms of property rights and contract enforcement. Furthermore, they have to maintain a social cohesion, solidarity and political stability. Moreover, other reason for a positive result as explained by the author is the general principles of economic policy. In some countries like China and Vietnam, their policies often don’t approach directly and aren’t made specifically so the result could still be changed and cannot be foreseen. It means that there wasn’t a perfect concept of policies. This flexibility in policies could bring a successful result to those countries. In the reverse, Latin America with too rigid policies cannot afford to develop reflection policies like China and Vietnam. This reason explained the lack of success on Latin America’s economic growth.

Thirdly, from his own evaluation on the trend of reform policies in developing countries, Professor Rodrik stated two concepts that provide guidance to developing countries for further development. One is Augmented Washington Consensus and the second one is Diagnostic Approach to Growth Strategies. According to the author, the first concept is almost failed and for the second concept, he could see some more opportunities to become successful. While Augmented Washington Consensus focused on the correction and reparation of the issues presented in the original policies, the Diagnostic Approach to Growth Strategies aimed to provide new ideas by identifying the major problem or the bottleneck in the economic sphere at any point in time, and to only focus on solving this bottleneck. The concentration on detail purpose, as opposed to the focus on many targets, could be seen as the main advantage of the second concept.

In conclusion, “Rethinking Growth Policies in the Developing Countries” provides a comprehensive review of reform policies‘s methodologies in the world during the last decade. Moreover, throughout his article, the author evaluates the reform models based on some main respects of both theories and realities. However, until now, I believe that the reform model in China and Vietnam remains inadequate. Economic based on market-oriented also has some imperfections, which need to be considered. In the other hand, a rapid increase on Globalization somehow forces China and Vietnam to take part more deeply and widely in the global economic. Consequently, there are some issues that they have to face when subsidy and protectionism factor are replaced by an equally business environment. Furthermore, as author mentioned, the Washington Consensus was collapsed because of the unaffected of the theory, rigid and uniform disciplines, and the completely globalization. On another hand, the application of reform policies depend mostly on each country’s situation, as Professor Rodrik assumes that the presence of a perfect model, which could apply for all countries, is impossible. Nowadays, it becomes difficult to foreseen the trend of global economic, thus, the economist forecast and the reform models become narrow. So, the answer to the question of the necessity or not to their focus and their actual situation.

"Rethinking Growth Policies in the Developing World:" Comments 3

By Magoti Suzanna Joachim (Tanzania)

1) INTRODUCTION

The article presents an account of different approaches on how developing countries can increase their growth rates and speed up the rate at which their citizens converge to the level of material well-being. The Author is also trying to provide an analysis on distinct approaches and reform by various economists of the 1980 and 1990 over the Economic Growth. Dan Rodrik also made an effort to offer some challenges, comparative analysis of The Augmented Washington Consensus Approach and Diagnosis Approaches to Growth Strategies and his own suggestion on what ca developing Countries do to speed up their Economic Growth.

2) SUMMARY OF THE ARTLCLE

a) The concept of Policy Reforms for Economic Growth gained momentum at the end of 1980-1990 by preaching the triple commandments which are stabilize, liberalize and privatize. This time marked the overwhelming of reforms around the World from Latin America to Sub-Sahara Africa Continent and in many places around Asia. In a relative short period, most developing countries unilaterally eliminated quantitative restrictions on imports, lowered tariff barriers and reduce the dispersion of tariff rates. According to this Article, It shows that despite of the adoption of these radical changes in policies, there was no analogous radical improvement in economic performance. Economic growth in those Countries that adopted the “stabilize, liberalize and privative” agenda has turned out to be low not only in absolute terms but also relative to other countries that were reluctant reformer and relative to the reforming countries’ own historical experience. Fiscal discipline, privatization and openness to trade have produced an economic performance that does not even begin to match the performance under import substitution.

b) The author is trying to provide his critical observation on why the reforms of the 1980s and 1990s have produced weak return in many developing countries by outlining two Approaches one is The Augmented Washington Consensus and two is A Diagnosis Approach to growth. According to this Article The Augmented Washington Consensus is impracticable because it does not take into account the amount of administrative capacity, human resource and political capital needed to complete the institution reform agenda, governments are overwhelmed with the range of things that need to be completed, copies of western legislation or “best practice” codes are adopted without much consideration of their suitability and adaptability and too little effort is made to render the reforms politically popular and ultimately sustainable.

c) He points out that, the trouble with the “do as much you can as quickly as you can approach as emphasized by the Augmented Washington Consensus is bad economics because the optimistic strategy may end up being targeted on areas of reform that are not particularly significant for economic growth at that point in time and may end up producing low economic returns. The vast majority of take-offs are not produced by significant economic reform and the vast majority of significant economic reform do not produce economic take-offs.

d) Furthermore, the author managed to analyze the diagnostic approach to growth strategies. He proposed that the biggest hit for the reform buck can be obtained by identifying the most significant bottleneck in the economy at any point in time, and focusing efforts on alleviating that bottlenecks. Thus, in order to deal with these bottlenecks we must be able to realize that if intermediation is problematic, there must be lack of competition among banks and/or high taxes on the financial system that are proportionate with the limits. And if labor skills are the constraints, it must show up in very high return to education, if taxes are significantly constraining private activity, the effective tax rate must be high, if corruption and other institution problems are dominant these should show up in cross-national survey evidence. If information or coordination externalities are rampant, there must be a shortage of new investment ideas and the policy setting needed to exploit new opportunities must be absent.

e) Therefore diagnostic approach clarifies why it is desirable to apply different fixes to different countries, match policy priorities with diagnostic signals, Find ways of identifying country specific solution and it is inherent bottom-up that it empowers countries to do their own diagnosis analyses. Diagnostic approach is sensitive to political and administrative constraints and it is dynamic in that it recognizes that the nature of the binding constraint changes over time.

3) RELEVANCE OF THE ARTICLE TO TANZANIAN SITUATIONS

i. The nature and content of economic reforms carried out in various countries in Africa and Tanzania in particular, have varied in terms of coverage and emphasis. However, the main elements of economic reform have been liberalization of internal and external trade, greater reliance on market forces (i.e. price liberalization, devaluations and interest rate adjustments), tight monetary policies, mainly in the form of credit squeezes, and tight fiscal policy in the form of budget cuts and public sector reforms. These policies have primarily been designed to restore equilibrium, especially in the balance of payments and the fiscal and monetary variables.

ii. The 1980s and 1990s was the moment in time in which Tanzanian government adopted several reforms as a response to economic crisis which was claimed to be a result of inappropriate domestic policies, including incentive structures, and the mismanagement of public resources (World Bank, 1981). In responding to the economic crisis, Tanzania government was forced as one of the IMF and World Bank condition to adopt Structural Adjustment Programmes. According to Husain (1994) it is indicated that for 1985-1990 the export volumes of nine major export commodities in countries which had undertaken Adjustment Programmes like Tanzania increased by 75 per cent as compared with the 1977-1979 averages. Yet export earnings from these exports had fallen by 40 per cent over the same period, because of deteriorating barter terms of trade.

iii. Some of the conditions embedded in Structural Adjustment Policy were Down-sizing Government structure for efficient human resource and effective service delivery, Introduction of Multi-party system for democratic government, Privatization of some of the public sectors such as Industries, mining sectors and hotels in order for improving performance and production. However, despite of the expected outcomes the return has been so slow and negative in some sectors. After all that beautiful plans and propagandas one was expecting rapid economic growth, Law inflation rate, Rapid reduced absolute poverty among the majority Tanzanian, and Increased employment and per capital income but this is not the case. It is almost 20 years since the adoption of structural and policy reforms but Tanzania is still lagging at the 3rd poorest country in Sub Saharan Africa despite of the richness in natural resources and tourist attractions.

iv. Never the less, since the inception of economic reforms in 1986, a large segment of Tanzania’s population has benefited from gradual poverty reduction, which was driven mostly by steady improvement in economic performance, implementation of structural reforms, and, in the most recent past, greater attention to public service delivery. GDP growth has been sufficient to allow increases in income per capita, including in rural areas. However the decline in poverty has been more pronounced in urban areas, while poverty in rural areas which employs more than 75 percent of the population, remains considerably higher. In conclusion therefore, one may argue that not every approach and reforms that have worked in the western countries can also be copied by developing countries to bring about economic growth in isolation of historical background, cultural and political condition and environment.

"Rethinking Growth Policies in the Developing World": Comments 1

By Md. Abdur Rouf Mia (Bangladesh)

The article on ‘Rethinking Growth Policies in the Developing World’ by ‘Dani Rodrik’ basically criticized the policy agenda suggested by the ‘Washington Consensus’ as it failed to produce conceived economic growths in many developing countries (e.g., many African and Latin American Countries), which followed ten principles in the original ‘Washington Consensus’. Rather, he pointed out that the countries (e.g., China, India, and Vietnam) that followed heterodox policies have achieved significant economic growths in last two or three decades. In this context, in order to provide effective guidance to the developing countries for achieving economic growth, this paper evaluates the strengths and shortcomings of two potential approaches: (1) an extension of the Washington Consensus adding ten more principles, and (2) a diagnostic approach to growth strategies.

The Augmented Washington Consensus, in fact, adds several policy agenda (e.g., flexible labor markets, anti-corruption) to remedy the weaknesses in the implementation of the original ten principles (e.g., openness, fiscal discipline, and privatization) of the ‘Washington Consensus’. However, again Rodrik has suspected the efficacy of the long-listed reform agenda due to several issues. Firstly, the reform agenda does not provide any priority, and they are being suggested without much consideration of their adaptability to the local conditions. Moreover, efforts on many diverse issues may not attain the ultimate goal. On the other hand, implementing ‘the best as you can’ suggested by the proponents of the ‘Washington Consensus’ would induce opportunistic strategy, which may end up with unexpected results (e.g., low returns). Secondly, there is a possibility to augment the reform agenda in future in the case of failure by putting responsibility on the adopters’ shoulder for not conforming many of the long-listed principles.

Therefore, Rodrik suggests that instead of focusing on many reform agenda, it is rather important to recognize the most important bottleneck in the economy at any point of time, and put efforts on removing this constraint. He argues that this diagnostic approach is simple, operational, and economical. In the following sections, I intend to examine the applicability of the arguments of this paper in my country, Bangladesh.

Although the paper rightly pointed out the weaknesses of the ‘Washington Consensus’, promoting trade liberalization (a principle of the consensus) appears to bring about positive outcome in Bangladesh. In fact, several papers (CPD, 2004; Gisselquist and Grether, 2000; Osmani, 2005) argue that trade liberalization has positive outcomes in Bangladesh. CPD (2004) indicates that the large-scale liberalization of market and trade by increasing the easy availability of modern agricultural inputs have expanded the rural nonfarm sectors. In the same context, Gisselquist and Grether (2000) show that farmers in Bangladesh were benefited from increased availability of farm inputs through the process of liberalization. In an extensive study, Osmani (2005) argues that embracing globalization has stimulated aggregate demand from three sources: increased crop production, remittance, and growths in ready-made garments sector in Bangladesh, which eventually helped the poor to escape or come out of the poverty. In this context, the World Bank (2002) and several other studies (e.g., Nargis and Hossain, 2006) confirm noteworthy achievements in poverty reduction in both rural and urban areas in Bangladesh in the last two decades.

Nevertheless, the diagnostic approach, suggested by Rodrik, could be a better way to solve other existing micro and macro economic problems in Bangladesh. For example, the banking sector in Bangladesh has a huge amount of idle money amounting to nearly 150 billion, whereas agricultural farmers has to borrow money from non-governmental organizations (NGOs) or money lenders at relatively high interest rates. Moreover, investments in the manufacturing or services sectors are also relatively low among many South Asian Countries. These facts suggest that government should identify the bottlenecks in this regard and should take effective measures to best utilize those idle money. Similarly, Bangladesh is confronting many other significant economic and non-economic issues (e.g., meager FDI inflows, lack of export diversification, absence of rural industrialization, weak institutions). Identifying the main causes of these issues and addressing them pragmatically should be the priorities of the government. Finally, I do agree with the statement that careful policy analyses, carried out by the professionals/academicians in the respective fields, should replace the shortcuts or broad economic principles.

References:
Center for Policy Dialogue, 2004, Promoting Rural Nonfarm Economy: Is Bangladesh Doing enough? CPD Report No. 66, Dhaka: CPD.

Gisselquist, D. and Grether. J.M., 2000, "An Argument for Deregulating the Transfer of Agricultural Technologies to Developing Countries," World Bank Economic Review, 14(1), 111-27.

Nargis, N., & Hossain, M., 2006, "Income Dynamics and Pathways out of Poverty in Bangladesh: 1988-2004," Agricultural Economics, 35(3): 425-435.

Osmani, S.R. 2005, "The Impact of Globalization on Poverty in Bangladesh," Working Paper No. 65, Geneva: ILO.

Dani Rodrik's "Rethinking Growth Policies in the Developing World"

Dani Rodrik, a professor at Harvard University, is well-known for his innovative and provocative thoughts pertaining to neo-classical approaches to growth policies in the developing countries. In "Rethinking Growth Policies in the Developing Countries," he highlights the flaws and weakness of a common set of policy prescriptions propounded by many economists in the West.

This paper was read by my students at the Graduate School of Governance Studies, Meiji University. The students are government officers from several developing countries. They are on their study leaves, in pursuing a Master's degree. Their comments, which are based on their career experiences, are indeed quite consistent with Professor Rodrik's critics. Their comments will be posted in this blog.

Aids to Navigation Fund

On July 7, 2009, Mr. Yohei Sasakawa, Chairman of the Nippon Foundation, pledged USD 2.5 millions to the "Aids to Navigation Fund" for the purpose of enhancing the safety, security and marine environment navigation and protection for Melaka and Singapore Straits. The Nippon Foundation, which is the largest private foundation in Japan, has been contributing to improving the safety of navigation in Melaka and Singapore straits for more than three decades.

The fundamental concept of the "Aids to Navigation Fund" is to encourage the "users-pay principle" in the Melaka and Singapore straits. Unlike air and land traffics, sea navigation is free of charge. For this reason, shipping business communities in the world have been free riders in sea. As a result, that behavior has created enormous burden to littoral countries in maintaining navigation safety.

After more than three and half decades of financial assistance for keeping safety of navigation in Melaka and Singapore straits, Mr. Yohei Sasakawa hopes that the inception of the "Aids to Navigation Fund" will become a model for international shipping business communities to adhering to the "users-pay principle" in sea navigations.

Meeting Malaysia's Prime Minister

Met Malaysia's Prime Minister Dato' Sri Najib Razak at his office at Putrajaya on July 6, 2009.