No abstract

Most well-trained economists would agree that the standard policy reforms included in the ‘Washington Consensus’ have the potential to be growth-promoting. What the experience of the last fifteen years has shown, however, is that the impact of these reforms is heavily dependent on circumstances. This chapter argues that this calls for an approach to reform that is much more contingent on the economic environment. It is possible to develop a unified framework for analyzing and formulating ‘growth strategies’ which is both operational and based on solid economic reasoning. The key step is to develop a better understanding of how the nature of the binding constraints on economic activity differs from setting to setting. This understanding can then be used to derive policy priorities accordingly, in a way that would use the scarce political capital of reformers efficiently. The methodology that it proposed here can be conceptualized as a decision tree. The first questions concern what keeps the level of domestic investment and entrepreneurship low. At each node of the decision tree, the kind of evidence that would help answer the question one way or another is discussed. The chapter draws on the experience of three specific countries: El Salvador, Brazil, and Dominican Republic. Aside from providing a useful manual for policy makers, this approach has the advantage that it is broad enough to embed all existing development strategies as special cases. It can therefore unify the literature and help settle prevailing controversies.

No abstract

We provide a conceptual and empirical framework for evaluating the effects of short-term capital flows. A simple model of the joint determination of the maturity and cost of external borrowing highlights the role played by self-fulfilling crises. The model also specifies the circumstances under which short-term debt accumulation is socially excessive. The empirical analysis shows that the short-term debt to reserves ratio is a robust predictor of financial crises, and that greater short-term exposure is associated with more severe crises when capital flows reverse. Higher levels of M2/GDP and per-capita income are associated with shorter-term maturities of external debt. The level of international trade does not seem to have any relationship with levels of short-term indebtedness, which suggests that trade credit plays an insignificant role in driving short-term capital flows. Our policy analysis focuses on ways in which potential illiquidity can be avoided