Economical vaccines

Regardless of what is discussed at the annual meetings of the International Monetary Fund and the World Bank, which are due to take place in Washington, DC in October, macroeconomic stability and better functioning markets are the two economic doses of vaccines that we have. need.

October 03, 2021, 10:45 a.m.

Last modification: 03 October 2021, 12:24

Jyoti Rahman. Illustration: SCT

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Jyoti Rahman. Illustration: SCT

Each October, finance ministers and central bank governors from around the world come together for the annual meetings of the International Monetary Fund and the World Bank. Meetings and seminars, round tables, workshops, conferences, etc. who accompany them, are also followed by senior officials responsible for economic development, participants from civil society, academics and public intellectuals, business representatives and, of course, demonstrators. Washington, DC is the usual venue, but once every three years, meetings are held elsewhere. Marrakech should welcome them in 2022.

With the Delta variant still prevalent around the world, this year’s meetings will be a hybrid of the physical and the virtual. The so-called “business scandal”, with a scorching call from Economist magazine for the resignation of IMF director Kristalina Georgieva, will also cast a veil on the debates.

In 2003, the World Bank began publishing an index that assessed and ranked countries on the basis of their regulatory and legal environment, ease of starting a business, financing, infrastructure, and other measures of the business climate. . Doing Business indicators have been taken seriously by multinationals, development practitioners and governments around the world. For example, in 2017, the Chinese premier expressed concern about his country’s delay.

Afterwards, China’s scores improved. And now an independent report claims the report was tampered with by Georgieva, then CEO of the bank, under “undue pressure” from China. At the time of writing, the future of the head of the IMF is at stake, while the World Bank had already canceled the annual Doing Business report.

The Doing Business indicators reflected one side of the so-called Washington Consensus, the other side being macroeconomic stability through prudent monetary and fiscal policies. The idea was that countries with healthy public finances, well-run banks, liberal trade and foreign investment regimes, and the rule of law would see more investment, innovation, economic growth, jobs and income over time.

These policy prescriptions reflect the dominant neoclassical economy that dominates international financial institutions, as well as finance ministries and central banks in large economies.

According to Kevin and Robin Grier of Texas Tech University, the Consensus worked in the direction expected by its supporters. Examining 141 countries between 1970 and 2015, the authors identified 49 cases of policy reforms as mandated by the Consensus.

They found that countries adopting Washington Consensus policies, on average and after controlling for other factors, grew 2.1 to 2.9 percentage points faster in the five years following the reform (and 1 to 1.9 percentage points faster over ten years) than countries that did not.

The authors used the Fraser Institute’s World Economic Freedom Index, a Canadian think tank, to identify countries that have adopted the Consensus prescriptions. In this index, countries receive scores between 1 and 10. The index consists of five components: size of government and taxation, private property and the rule of law, sound currency, trade regulations and tariffs. , regulation of business, labor and capital markets. The higher the score, the more a country complies with the Consensus.

From there, a simplistic claim would be that liberalized economies with deregulated markets and privatized industries would perform better. A more nuanced interpretation is that a country with a government capable of financing its budgets and upholding the rule of law and a well-regulated (including banking) and globally competitive private sector is more likely to withstand adverse shocks.

Seen in this light, Grier’s finding is that countries that have not adopted the Washington Consensus are likely to grow more slowly than those that have. Seen in this light, the Consensus is like a vaccine that makes a person more resistant to disease, instead of increasing their fitness or stamina.

The authors identify the reform cases as countries with a one-point jump in five years, with the highest score maintained for the following decade. Bangladesh narrowly falls short of making the cut – the country’s score increased by 0.99 in the five years leading up to 2000. In the previous two decades, the score had steadily increased. This trend stopped after 2000, and Bangladesh’s score has actually declined since 2009 (Figure 1).

Bangladesh’s performance in the World Economic Freedom Index over the years.

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Bangladesh's performance in the World Economic Freedom Index over the years.

Bangladesh’s performance in the World Economic Freedom Index over the years.

In other words, if the authors’ calculations are taken at face value, Bangladesh would have grown much faster if the political trends from before the 2000s had continued over the past two decades.

One can quibble about this or about the weights and calculations underlying Bangladesh’s score in the index for any given year. But taking a step back, do we ask if the country’s banks, financial markets and various specific sectors were better regulated in the 2010s or 1990s? In what decade have we seen more scandals? In which decade have the courts been most trusted?

An honest soul-searching on any of these issues would lead to the very disturbing conclusion that Bangladesh did not do as well as one might expect at the turn of the century. Regardless of what is discussed in Washington, DC in October, macroeconomic stability and better functioning markets are the two economic doses of vaccines we need.

Sadly, the graph above doesn’t inspire much confidence in Bangladesh’s chances of getting the jabs.

Jyoti rahman is an applied macroeconomist. His analyzes are available at www.jrahman.substack.com

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