Friday, May 10, 2013
Institutional setting for growth. What matters more than policies
It is usual to think on economic policies as the isolated instrument for economic growth, such that the impact of policies becomes a matter of evaluating its proper design and timing . Thus, there are good or bad policies according they get the outcomes they were designed for. However, these outcomes might be far away from what it was intended. A good example is the questioning of monetary policy applied by the Federal Reserve between 2001-2004 in the USA, and its implication for the beginning of the housing bubble and the crash of 2008. It is clear that although there was a mix of factors for that bubble to take place, the conclusion has been that it started out because monetary policy was too soft for too long. The surrounding conditions which influence policies effectiveness are left out. Let mentions some of those relevant surrounding conditions for other policies, for example : redistribution policies without quality standard for services, environment policies without institutions and leadership, financial policies without proper regulation and transparency, and state involvement in the economy without efficiency criteria, make a short list of cases which deals with those variables outside of policy makers chance to reach, but decisive for its final outcome. What do all of these means?. Policy effectiveness goes beyond its design .It is also connected with the conditions and characteristics of the setting upon which they are implemented. Out of date laws. weak institutions, short run minded politicians, special interest influence, inefficient state intervention, regulations flaws add all that up to a different real setting hard to assimilate into economic models . As a matter of fact, the financial crisis of 2008, was not anticipated by any of these models because its lack of consistency with the real setting. Thus, a lesson from the financial crisis of 2008, is that the meaning of timing should be far more inclusive than what usually is.- An alternative line of reasoning goes on a different approach. Let say, to focus on the necessary conditions for better effectiveness of policies, leaving aside the design issue, but focusing on the strengthening of timing conditions. Since the beginning of the nineties, Latin America has done huge progress on this regard: Better institutions, (autonomous Central banks) broader consensus,(integration to the world with social inclusiveness) pragmatism based reforms,(financial sector improvement qualifications), have increased the investment profile of some countries, as long as it all fit with the necessary conditions for more effective policies. Sure, we do not need to wait and see for the same wall to fall twice. As a result, it has created a positive expectations to reinforce the virtuous circle of investment and growth. It would be desirable a more homogeneous standing of all Latin America countries on the timing issue, to take advantage of current opportunities, because the actual lag will might become persistent and sooner or later, it will make clear the difference between those countries which were wise enough to move toward the path of prosperity, while others chose to be left behind with not many chances of catching up those on the lead.