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From: Million Woldabzgi (wolda002@umn.edu)
Date: Tue Nov 02 2010 - 01:13:19 EST
Big ideas are emerging from small countries
By JEFFREY FANKEL
CAMBRIDGE, Mass. — Two decades ago, many people thought that the lesson of
the 1980s was that Japan's variant of capitalism was the best model, and
that other countries around the world should and would follow it. The
Japanese model quickly lost its luster in the 1990s.
A decade ago, many thought that the lesson of the 1990s was that the United
States' variant of capitalism was the best model, and that other countries
should and would follow. The American model lost its attractiveness in the
2000s.
So, where should countries look now, in 2010, for models of economic success
to emulate?
Perhaps they should look to the periphery of the world economy. Many small
countries there have experimented with policies and institutions that could
usefully be adopted by others.
Costa Rica in Central America and Mauritius in Africa each pulled ahead of
its regional peers some time ago. Among many other decisions that have
worked out well for them, both countries have foregone a standing army. The
results in both cases have been a political history devoid of coups, and
financial savings that can be used for education, investment, and other good
things.
A panoply of innovations has helped Chile to outperform its South American
neighbors. Chile's fiscal institutions insure a countercyclical budget. Many
governments increase spending excessively in booms, and then are forced to
cut back in downturns, thereby exacerbating the cyclical swings.
There are two key elements to Chile's fiscal institutions: * A structural
budget balance rule allows deficits only to the extent that the current
price of copper is below its 10-year equilibrium or output is below its
long-term trend. * Two panels of technical experts are the ones to judge
trends in copper prices and output, respectively, insulated from the
political processes that can otherwise succumb to wishful thinking.
These institutions are particularly worthy of imitation by other commodity-
exporting countries, in order to defeat the so-called natural-resource
curse. Even advanced countries such as the U.S. and United Kingdom could
learn something from Chile, given that in the last expansion they evidently
forgot how to run countercyclical fiscal policy.
Singapore achieved rich-country status with a unique development strategy.
Among its many innovations were a paternalistic approach to saving and use
of the price mechanism to defeat urban traffic congestion (an approach later
adopted by London).
Other small advanced countries also have lessons to offer. New Zealand led
the way for much of the world's central banks with inflation targeting,
along with many liberalizing reforms in the late 1980s. Perhaps its Labor
Party should be given credit for pioneering the principle that center-left
governments can sometimes achieve economic liberalization better than their
center-right opponents.
Ireland showed the importance of foreign direct investment. Estonia led the
way in simplifying its tax system by means of a successful flat tax in 1994,
followed by Slovakia and other small countries in Central and Eastern Europe
and elsewhere (including Mauritius again).
Mexico pioneered the idea of Conditional Cash Transfers (the OPORTUNIDADES
program — originally PROGRESA — which was launched in 1998). CCT programs
have subsequently been emulated by many countries in Latin America, Asia and
Africa.
Mexico's innovation was really two revolutions in one. First, there was the
specific policy idea of making poverty benefits contingent on children's
school attendance (an idea that has been embraced even in New York City).
Second, and perhaps more importantly, the Mexicans implemented the
methodological idea of conducting controlled experiments to find out which
policies work and which don't work in developing countries (which has fed
into the exciting Randomized Control Trials movement in the field of
development economics).
Also in the 1990s, largely thanks to the leadership of then-President
Ernesto Zedillo, Mexico adopted nonpartisan federal electoral institutions
that in 2006 proved able to resolve successfully a disputed election. (By
contrast, it turned out in November 2000 that the U.S. had no such mechanism
in place, other than the preferences of political appointees.) More
recently, the current president, Felipe Calderon, has shut down the
entrenched electric utility and pursued much-needed tax, pension and other
reforms.
In highlighting some very specific institutions that could be usefully
adopted elsewhere, I do not mean to suggest that they can be effortlessly
translated from one national context to another. Nor do I mean to suggest
that these examples are entirely responsible for the economic success of the
countries where they are found. (Indeed, a few of these countries have
recently been wrestling with severe problems.) But a country does not have
to be large to serve as a model for others.
Small countries tend to be open to trade. Often, they are open to new ideas
— and freer than large countries to experiment. The results of such
experiments — even those that fail — include useful lessons for all of us.
Jeffrey Frankel is professor of government at Harvard University's John F.
Kennedy School of Government. © 2010 Project Syndicate
The Japan Times: Thursday, Oct. 28, 2010
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