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Name the four higher order principles of sound economics
in practice, growth spurts are associated with a __ range of policy reforms
policy reforms associated with growth transitions typically combine elements of __ and __institutional practices
__ growth is more difficult than __ it
__ growth requires more extensive institutional reform
what is the two pronged growth strategy?
investment strategy to kick start growth and institution building to sustain growth
investment strategy to kick start growth involves getting entrepreneurs excited about investing in their home economy by __
addressing government and market failures
institution building to sustain growth especially necessitates __ and __ to be implemented
rule of law
give six examples of government failures
high government wages
large tax burden
burdensome licensing requirements
market failures are grouped into __ and ___
what are three categories of learning externalities?
human capital externalities
learning about costs
four groups of coordination failures
wage premium in manufacturing
specialized intermediate inputs
spillovers associated with wealth distribution
what is Douglas North's definition of institutions?
prevailing rules of the game in society
research in institution building has focused on __ and __
rule of law
various institutional reforms will result in __ higher order outcomes
three reasons for institutional non-convergence
social preference (equity/efficiency tradeoff)
complementarities between institutions (hysteresis and path dependence)
required institutions to promote economic development differ between rich and poor countries
institutional __ has worked in some contexts, but not others; it should not be assumed to work
The Growth Diagnostics Framework seeks to __
analyze and formulate growth strategies that are operational and based on solid economic reasoning
create a strategy for figuring out policy priorities
standard second-best theory
if it is not possible to remove a market distortion, introducing one or more market distortions may partially counteract the first and lead to more efficient outcomes
__ drive a wedge between private and social valuations of specific economic activities
distortions (government or market failures)
distortion wedge =
social valuation - private valuation
rather than a whole sale approach that attempts to make policy reforms in several areas of distortion (like Washington Consensus), focus should be given to __
reforming the largest distortion
focusing on reforming the largest distortion often has __
direct and indirect effects (second-best interactions)
three broad determinants of growth
returns to accumulation
private appropriability of accumulation
cost of financing accumulation
policies for economic restructuring moving the economy into more dynamic activities generally -within any sectors
industrial policy focuses on policy __, not outcomes
industrial policy focuses on __ in search of new opportunities for economic growth
with industrial policy it is important to get the right balance between government's __ and __
according to Imbs and Wacziarg's U-Shaped Curve, as poor countries become rich, industrial concentration is __
according to Imbs and Wacziarg's U-Shaped Curve, high income nations return to __
more concentrated, specialized industrial areas
Imbs and Wacziarg's U-Shaped Curve goes against the __
Ricardian principle of comparative advantage
an activity that has great social value but little private remuneration
Entrepreneurs must experiment with new products by engaging in __
other, future, producers and society at large will
benefit while the initial entrepreneurs will face all the risk.
__ over first-best solutions
carrot and stick strategy
first-best solutions attempt to...
provide general subsidies for new
Carrot and stick strategy attempts to...
provide a carrot, in the form of rents, for initial entrepreneurs, while also enforcing performance requirements that guides entrepreneurs from inefficiency
each new entrepreneurial endeavor requires particular complementary goods If these
complementary goods are not available they will most likely not engage in investment
in the context of coordination externalities, if complementary goods are not available, they will most likely not engage in investment. However, because the entrepreneur doesn't invest...
complementary good is never invested in either
to overcome coordination externalities subsidies are not necessary, governments can use __ or __
to overcome coordination externalities, policy should focus on __, not __
particular new technology or activites
a whole industry itself
what are the two limitations to industrial policy?
public sector has limitations to it information
open to corruption and rent seeking
in institutional arrangements, it is important to find balance between public __ and __
in institutional arrangements __ is more important than __
what are the three elements of institutional architecture?
political leadership at the top
coordination and deliberation councils
mechanisms of transparency and accountability
what do mechanisms of transparency and accountability contribute to institutional architecture?
legitimize economic growth strategies for society
what do coordination and deliberation councils contribute to institutional architecture?
facilitate exchange of information and social learning between public-private parties
what does the political leadership at the top contribute to institutional architecture?
raises the profile of economic issues
provides coordination, oversight and monitoring
provides accountability for success or failure
what are the ten design principles
1. incentives only for new activities
2. clear criteria for success and failure
3. built-in sunset clause
4. public support must target activities, not
5. subsidized activities must have clear potential for spillover effects
6. authority for carrying out industrial
policies must be vested in agencies with
7. implementing agencies must be
monitored closely by a political authority
8. agencies carrying out promotion must maintain channels of communication with the private sector
9. mistakes that result in 'picking the losers' will occur
10. activities need to have the capacity to
illustrative programs of institutional architecture (6.)
1. Subsidizing costs of "self-discovery": related to new activities, promote learning spillovers, must be transparent.
2. Developing mechanisms for higher-risk finance: development banks, publicly
funded venture funds, public guarantees for longer-term commercial bank
lending, special vehicles that direct public pension funds to higher-risk
3. Internalizing coordination externalities: public-private partnerships need to occur at various levels: national, regional and local.
4. Public R&D: ensure that publicly funded R&D is linked to private sector
5. Subsidizing general technical training: if governments cannot provide training
that equips workers for the private sector's current needs, subsidize technical
training through matching grants so private sector can direct the education for
6. Taking advantage of nationals abroad: governments can provide incentives for
skilled workers living abroad. (to counter 'brain drain')
which institutions matter? (5)
institutions for macroeconomic stability
institutions for social insurance
institutions for conflict management
property rights matter because...
there is little incentive for entrepreneurs if they do not have control over the return to the assets they have invested in
property rights are contingent on the definition of "__ __ __"
greater public purpose
Property rights differ from place to place: in the US
intellectual property rights are guarded at all costs while land property rights are violated with regard to __
regulatory institutions matter because...
while not cost-free, they reduce transaction costs by ensuring participants play by the rules
markets fail when __ make basic endeavors too costly
transaction costs increase when participants engage in __ and __ behavior.
__ will differ from location to location and also evolve overtime within a location
institutions for macroeconomic instability matter because...
macro economies and in particular the financial systems that facilitate them are prone to instability
importance of good macroeconomic policy - monetary policy through __ and __
lender of last resort
__ __ __ limits policy options for independent monetary policy
international currency dependency
institutions for social insurance matter because...
it legitimizes a market economy by rendering it compatible with social stability and social cohesion.
__ __ shift individuals and families away from traditional support systems embedded in kin groups, religious groups and villages
institutions for conflict management matter because...
conflict is harmful both because it reduces social cohesion and because it diverts resources from productive purposes
Rule of law, high-quality judiciary, representative political institutions free elections, independent trade unions, social partnerships, institutionalized
representation of minority groups, and social insurance all serve as a __
serve to warn potentional 'winners' of social conflict that their gains will be limited while assuring potential 'losers' that they will not be expropriated
what are the two modes of institutional acquisition?
using local knowledge
in participatory politics, participation creates __
four characteristics of participatory politics (democracies) as a meta institution
yield relatively predictable long-run growth rates
produce greater short-term stability
handle adverse shocks much better
deliver better distributional outcomes
development economists generally agree that __ matters to economic growth
what are the two issues with empirical studies on the relationship between institutions and economic growth
endogeneity issues (what is causing what?)
endogeneity issues in relating economic growth to institutions...
do good quality institutions cause economic growth, or does economic growth cause good institutions?
__ are used to bring clarity to the direction of causality
__ are used as instruments, not as the key explanation of a phenomena/regularity - geographic location is correlated with institutions and the error term, but not economic growth.
Scholars are divided in opinion on endogeneity issues - __ and others suggest that geography has a direct effect on economic growth, while __ and others suggest that it has an indirect effect through institutions
two challenges to measurement issues in relating economic growth to institutions...
perceptions are shaped by environmental factors such as the economic conditions in general
general perceptions about institutions are not specific to institutional forms
Institutional quality is often measured by surveying...
domestic and international investors' perceptions
various institutional forms serve similar institutional __
empirical research seeking to find __ __ __ that serve to sustain economic growth will not be successful
generalizable institutional forms
__ economic growth requires minimal policy reform and even less institutional reform
__ economic growth requires focused institutional formation
Policy reforms for spurring growth and institutional formation is __ and __ context specific
the __ is the crowning achievement of the 20th century
enhanced trade and financial integration
markets are striving to become __ while the institutions needed to support them remain __
tension between __ and __: national boundaries limit
__ while producers and investors desire to go global weakens institutions and leads to __
__, even without trade barriers, seem to constrain the
flow of goods and services
international asset markets have become increasingly integrated, but investors continue to show __
globalization will need to go much further in order to gain the full __ benefits
the open-economy trilemma is between __, __, and __
independent monetary/fiscal policy
fixed exchange rates
the political trilemma is between __, __, and __
international economic integration
the scenario with international economic integration and the nation-state is __
the golden straightjacket
the scenario with international economic integration and mass politics
the scenario with mass politics and the nation state
Bretton Woods compromise
countries would submit to a supranational government body (U.S. but global scale)
the golden straightjacket
nation state establishes law and regulation that serve the integration of global economies
no public goods may be offered if they interfere with economic integration and the fulfillment of the 'law of one price'
nation states will pursue tight money, small government, low taxes, flexible labor legislation,
deregulation, privatization and openness all around
Bretton Woods compromise
countries were free to dance to their tune as long as they removed a number of border restrictions on trade and generally did not discriminate among their trade partners
countries were encouraged to maintain restrictions on capital flows
Trade protection in the form of quotas were frowned upon but import tariffs were permitted
given that... the Bretton Woods regime is the best approach moving forward
the nation state remains the decisive actor in international policy issues
with the Bretton Woods compromise, there is a challenge to balance two issues
establish a set of rules that encourage policy convergence on a volunteer basis
establish a set of rules with sufficient flexibility for divergence in national norms and preferences
there are reasons to include '__' in international agreements
governments are not penalized for withdrawing from agreements when there is insufficient incentive for them to have played by the rules in the first place
the outcome is better for all parties because unnecessary trade conflicts do not occur
when temporary opt-outs are not possible (due to suboptimal free-for-all & lack of commitment) actors may exit a trade deal by paying a tax
__ and __ include allowances for countries to escape trade deals under specific situations
name two specific situations under which WTO and GATT allow countries to escape from trade deals
nontrade and foreign policy reasons
the __ encourages more regional trade (issues in politics are often quite similar)
Bretton Woods compromise
in regard to international finance, __ and __ have developed a strict list of codes and standards
some of the standards set by the IMF and World Bank conflict with domestic goals such as __ or __
establishment of development banks
three reasons global federalism may work
technical progress will foster economic integration and reduce traditional obstacles to global government
not likely for global population to willingly give up the increases in living standards achieved through heightened integration
citizenship rights are unlikely to be given up and thus politicians will remain accountable to the wishes of their electorate
one possible scenario of global federalism is that __ will leave national leaders with little choice but to follow the __
another possible scenario is that national governments will resort to __ in dealing with distributive
and governance problems posed by increased __
the objective of global trade is a means to promote __, not to increase __ for its own sake
the __ view on trade - "trade has become the lens through which development is perceived, rather than the other way around"
the __view - "The WTO's focus on expanding market access and deepening integration through the harmonization of a wide range of 'trade-related' practices is precisely what development requires"
the __ view - "a development-friendly international trading regime is one not purely focused on enhancing poor countries' access to markets in the advanced industrial countries. It is one that enables poor countries to experiment with institutional arrangements and leaves room for them to devise their own, possibly divergent solutions to the development bottlenecks that they face"
two lessons on trade liberalization from Haiti and Vietnam
leadership committed to development is far more effective than trade liberalization
global economic integration is an outcome, rather than a prerequisite, of successful growth strategy
__ are the outcome of an economy's overall performance, they are not in the government's control. Government's control trade __
the data is clear - there is no systematic relationship between a country's average level of __ and its subsequent economic growth rate
no country has grown by turning its back on __ and __
long-term capital flows
__ are important because they provide a means by which a country can import capital goods (advanced production technology)
trade __ is not inherently preferable over trade liberalization
there is no clear evidence that trade __ will lead to
economic growth and development.
compliance with WTO not only requires lowing of trade barriers, but also a whole host of other institutional requirements such as:
foreign investor policies
tax reform (to make up for lost tariff revenue)
social safety nets (to compensate displaced workers)
credibility enhancing institutions
training programs to build export oriented skilled labor
while institutional requirements in compliance with WTO may be rational policy suggestions, they are highly __ and __
the legal reform example of crowding out development priorities is when a government '__' legal codes and standards to ensure protections for __ investors at the expense of __ investors
the public health example of crowding out development priorities is when __ requires countries to take a hands-off approach to __ held by foreign pharmaceuticals. This may be at odds with greater public purpose in a domestic context.
the industrial strategy example of crowding out development priorities is when a government takes a broad __ strategy, it may give up a way to develop particular __ oriented industries or zones.
the anticorruption strategy example of crowding out development priorities is when international organizations and investors pay particular attention to '__corruption' and tolerate '__ corruption'.
grand corruption tends to cost __ greatly while petty corruption tends to cost __ the most.
the local poor
what belongs on the agenda of institutional reform is building up __, not diminishing it
five principles that enhance domestic development priorities while supporting trade:
1. trade as means to an end, not an end in itself.
2. trade rules have to allow for diversity in national institutions and standards.
3. nondemocratic countries cannot count on the same trade privileges as democratic ones.
4. countries have the right to protect their own institutions and development priorities.
5. countries do not have the right to impose their institutional preferences on others.
trade serves at best as an instrument for achieving the goals that society seeks: (4)
quality of life
rich and poor countries have very different needs in the areas of __ protection. Poor countries need the space to follow developmental policies that richer countries no longer require.
labor and patent
trade rules should seek peaceful __ among national
practices, not __
the presence of __ and __ provides a presumptive cover against the charge that labor, environmental, and other standards in the developing nations are inappropriately low
exports of nondemocratic countries deserve greater scrutiny when they entail costly __ or adverse __ in importing countries
__ that are harmed by increased imports have a right to pursue an investigation and, if indeed deemed harmed, permitted to impose temporary trade barriers in response
during WTO investigations, in addition to industries effected by increases in imports, other __ should be permitted to voice their opinions. It may be in the national interest to allow a particular __ to be harmed if it benefits the rest of the country's strategy.
developing countries should be able to __ of trade agreements when they benefit little.
opt-outs should be used to uphold a country's own __, not __ those priorities on other nations.
__ to promote a country's own preferences are rarely
effective (other than in cases of repressive political regimes)
three sources of slippage between what
development requires and what WTO does
WTO does not fundamentally pursue free trade.
there is no guarantee that free trade is the best policy for development
WTO compliance may crowd out more helpful domestic development policies
Three key advantages of a developmental
approach to trade policy
1. create a development-friendly international economic environment - saves developing countries 'political capital' for dealing with domestic issues
2. If the WTO manages institutional diversity, developing countries will gain an freedom to pursue their own policies
3. bridges the divide between developing country governments and Northern NGOs
__ is the defining issues between anti-globalizers and globalizers
globalizer's response to slow growth for many countries in the 1990's: global poverty has actually __, while most countries have seen lower income growth, __ and __ have experienced rapid increases in growth; these two countries alone contain over half the world's poor
these countries that experienced the highest levels of growth are those that have increased __, such as China, India, and Vietnam
In response to the globalizers, one could point out that China, Korea, Taiwan, and India all followed __ policies
before increasing __
developing countries are being asked to pursue institutional reform that took today's advanced economies __ to accomplish
If we examine the evolution of institutions in these advanced economies we see that import __ and internal __ were almost universal
while WTO/IMF/World Bank tend to advocate the __ of goods, services and capital, there is little advocacy to pursue the free movement of __ across borders.
__ is the one area where 'free trade' would accomplish much in the developing world
global labor mobility
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