W7 - Review of policies in East Asia and the Washington consensus

Question 1

What export policies led to the East Asian ‘miracle’?

Answer 1

Export-oriented, savings and investment stimulation and market based (not laissez aire) model with close government intervention but their policies were far from capitalistic liberal ‘free market’ recipes from the West.

Question 2

What is the Washington consensus?

Answer 2

An agreement on a set of policy recomendations for developing countries between the World Bank, the IMF and the US treasury that became popular during the 1980s. The recommendations are based on a one-size-fits-all market liberalisation deregulation and privatisation

Question 3

Would the EA miracle have been still possible if the Washington consensus was implemented in EA?

Answer 3

Historical evidence in other parts of the world does not favour this (Latin America, Russia)

Question 4

What are the 10 components of the original Washington Consensus?

Answer 4

1. Fiscal discipline
2. Reorientation of public expenditures
3. Tax reform
4. Interest rate liberalisation
5. Unified and competitive exchange rates
6. Trade liberalisation
7. Openness to FDI
8. Privatisation
9. Deregulation
10. Secure property rights

Question 5

What are some of the ways that EA did not follow the Washington consensus?

Answer 5

Instead of of letting the market determine everything China kept many tariffs, a managed exchange rate. EA had protections for infant industry and capital flows initially that well-protected their development.

Question 6

How do interest rates in Vietnam and China compare to the WC?

Answer 6

In Vietnam and China, all lending rates are controlled by the government rather than setting a standard rate and letting the market decide the rest

Question 7

How did EA differ from the WC regarding property rights?

Answer 7

WC: Private enforced by law
EA: Private but government may override (Korea)

Question 8

How did EA differ from the WC regarding corporate governance?

Answer 8

WC: Protection of shareholder rights (outsiders)
EA: Insider control

Question 8

How did EA differ from the WC regarding business-government relations?

Answer 8

WC: Arm’s length, rule based
EA: Close interations

Question 8

How did EA differ from the WC regarding industrial organisation?

Answer 8

WC: Decentralisation, competitive markets
EA: Horizontal and vertical integration in production and government mandated cartels

Question 9

How did EA differ from the WC regarding financial system?

Answer 9

WC: Deregulated, securities based with free entry
EA: Bank based, restricted entry, heavily controlled by government

Question 9

How did EA differ from the WC regarding labour markets?

Answer 9

WC: Decentralised and flexible
EA: Lifetime employment in core enterprises (Unions not allowed in Singapore and Japan)

Question 10

How did EA differ from the WC regarding international capital flows?

Answer 10

WC: “Prudently” free
EA: Restricted until the 1990s (After liberalisation, suffered AFC)

Question 11

How did EA differ from the WC regarding public ownership?

Answer 11

WC: None in productive sectors
EA: Plenty in upstream industries (Many state owned companies in Singapore and China that are globally competitive)

Question 12

How did China’s response to low agricultural productivity differ to the WC solution?

Answer 12

WC: Price liberalisation
China had dual control price system to gradually liberalise this

Question 13

How did China’s response to low production incentives differ to the WC solution?

Answer 13

WC: Land privatisation
China has never privatised land

Question 14

How did China incentivise agricultural production?

Answer 14

The Dual-track approach that liberalised agriculture at the margin selling surplus crops after meeting their obligations to the state

Question 15

What was another of China’s non-standard policies?

Answer 15

The household responsibility system

Question 16

Under the household responsibility system waht happened?

Answer 16

Land was assigned to households according to size and township and village enterprises (TVEs)

Question 17

What were Korea’s non-standard policies?

Answer 17

• Co-ordinated investments in targeted sectors by picking winners rather than taking arms length approach
• Build out of heavy industry against the WB recommendations
• Socialisation of investment risks through implicit bailout guarantees despite opposition due to moral hazard
• Bank lending based on government’s priorities

Question 18

What were common non-standard policies in China and Korea?

Answer 18

• Foreign currency capital controls
• Protection of key domestic industries
• Financial market control with credit rationing
• Limited incremental market liberalisation
• Agricultural sector reform at the local and village level

Question 19

Why did the Washington Consensus fail in EA?

Answer 19

• Relied on rules of thumb based on first best thinking rather than second best reasoning (distortions in markets, poor institutions weren’t accounted for)
• Overlooked the impossibility of removing all distorted margins institutional or otherwise simultaneously

Question 20

Why do markets tend to work poorly in developing countries?

Answer 20

• Government failures (institutional shortcomings)
  (Weak property rights, poor contract enforcement, excessive taxation, macro instability)
• Inherent market failures

Question 21

Why does the WC ‘governance agenda’ not work often?

Answer 21

Because they assume they can fix government failures but ignore the inherent market failures

Question 22

What are the inherent market failures in developing countries?

Answer 22

Informational and coordination failures imply that markets generically under-provide structural transformation from low to productivity activities, which is the essence of development. This is ignored by the WC ‘governance agenda’

Question 23

How should the WC be changed to provide stronger support to developing countries?

Answer 23

• Sound reform policy should be strategic and context-specific
• Development policy should diagnose areas of reform with the
  biggest bang for buck and design policy approaches that economise
  on administrative resources while taking into account second-best
  complications
• In practise the best reforms have been selective sequential and
  unorthodox targeting binding constraints

Question 24

What does good development policy consist of?

Answer 24

• Development policy should diagnose areas of reform with the
  biggest bang for buck and design policy approaches that economise
  on administrative resources while taking into account second-best
  complications
• Focus on promoting structural change through appropriate use of
  industrial policies (protectionism)