Grzegorz W. Ko?odko: Professor Jorge Braga de Macedo was the Finance Minister of Portugal in 1991-93. At that time he was somehow able to tackle the issue of fiscal deficits. Then in 1994 and 1995 he was elected to the Portuguese parliament. In 1997 he became professor of economics and finance of Nova University in Lisbon, the prestigious and leading research and teaching institution in Portugal. He is still in touch with this university in spite of the fact that in 1999 he became the President of the Development Centre of OECD – the Organisation of Economic Cooperation and Development. Professor Braga de Macedo will share with us his views on the topic: ‘From Transformation to Development: Globalisation and Perspectives for Economic Policy’. George, it is a pleasure to have you here, the floor is yours.

Jorge Braga de Macedo: It is a pleasure to be here because for quite some time I have thought that development problems and transition problems gain in being looked at together. You know very well that development economics is a branch of economics that has had a very special fate among the economists. In the post-war period there was a moment of great enthusiasm about development almost as a separate field, separate from economics. As mainstream economics, there was development economics as a special field. That created a little bit of a bad name for development economics after the initial enthusiasm. The question was, of course, why should there be economics for some countries and then development economics for other countries. It was a little bit strange.

Fortunately, in the late 1980s development, which had become a little bit of marginal field, came back in full force. We can date it as we want but I think we should look at the 1985 Marshall lecture by Bob Lucas who later had the Nobel Prize in economics where he said: ‘We are simply concerned about the way people and nations get rich’ (the paper was published in the July 1988 issue of the Journal of Monetary Economics and has been reprinted e.g. in Grossman 1996. See also Lucas 1990). This is the traditional message of economics, nothing special about it. But we have to be careful because some institutions that are taken for granted in some countries, maybe especially Anglo-American tradition, are not so easy to establish, to let alone to develop in other latitudes or other cultures.

This is an interesting problem. It is not an exclusively economic problem but to the extent that it is economic, it should be addressed with the tools of economics. This is the current state and this is how we do the work at the Development Centre very closely linked with other departments of the OECD where economic analysis is applied with common sense, social science, political science and other types of analysis. Because what we want is to influence the way people look at the environment and the way in which they transform it. The ‘T’ from TIGER is transformation, so we are not pursuing academic research alone, we are trying to influence governments, especially member countries governments and we are doing it with a particular set of tools. This is what I want to convey to you, the way in which development and transition are looked at should not be different in terms of the tools, it should be different in terms of the assumptions about institutions, and there economists have a lot to say as well.

There is a saying from a Russian writer, Tolstoy I think, from his ‘War and Peace’, that ‘Happy families have the same history but unhappy families are unhappy in their own way’. Developing and emerging and transition countries are very specific. Then you come to some rules, maybe OECD type rules, and you find that problems continue difficult but are very similar. Imagine the paradox: poor countries are very different from each other, rich countries end up being more similar on the economic side and yet the knowledge of poor countries is far less abundant. You know much less about countries in Central Asia in Latin America in Africa than you do about European countries. You know less about Poland or Portugal than you know about France or Italy or the United Kingdom and yet the problems form an analytical standpoint in Poland, Central Asia or Africa are far more difficult: less data, more different institutions, much more demanding. This is what we hope to redress through analysis at the Centre and in other parts of the OECD that are concerned with the process of transformation. The OECD is not the rich men’s club any more. The Secretary General constantly reminds his audience when he speaks, and the last time was in Naples, precisely about e-commerce, that he stressed the importance of development. By the way, OECD, Professor Ko?odko was careful to spell it out, in case some of you might not remember what the acronym stood for, ‘D’ is there for development. We are on a familiar terrain.

What I want to do here is very quickly bring to your attention four points under the general umbrella that the way to understand development, that includes transition as I just said, is to combine two great forces that are at work all over the world at the moment. First is what we call globalisation and the opening of markets. Globalisation is not just trade but the opening of other markets, capital markets, information markets and even, to some extent, migration. Second, we look at the responses on the governance side. That is to say what do national, regional such as Europe or even global institutions do and what can they do to cope with the challenge of globalisation. That is the problem at hand. To address it, I will very quickly identify four topics.

The first one is more connected to the topic of your conference. This has to do with the role of the new technologies, the New Economy. Two colleagues here have already mentioned enough about this. Allow me to simply repeat what David O’Connor either said or should have said, namely to enumerate what DIALECTTT means. DIALECTTT with three T’s: Digital Infrastructure, these are the keys to being able to take advantage of the information technology; Access, Literacy, not just broadly speaking but the computer literacy, and our favourite words at the Development Centre – Entrepreneurship and Contents, what is it that you are actually transmitting. Then finally the three T’s: Trust, Taxes and Transparency, three crucial dimensions of governance.

How can you live in a society without trust? You may say that you do it. I understand. But we all know that the importance of trust is there, you may not find it in our day-to-day relations as much as we would like but we, economists, understand how trust is important. May be we call it incentive compatibility, it does not matter, but we understand it very well. Taxes – we also understand this well, although we do not necessarily approve of them. Of course it is not an accident that taxes and Tanzi start by the same letter because they are equivalent and synonym to many of us who admire Vito’s work on the subject. Finally, transparency, which is another way of saying that clean government, public opinion, and civic society matter. I am sure that you have already heard the example of procurement of weapons in India. By the way, it is a member of the Development Centre who joined us two weeks ago. In India you saw how new technologies were able to create an atmosphere of transparency that would otherwise not have been possible. You all know about this fact. I am building on this now to present two specific points from my current research.

One has to do with finding indicators of governance and indicators of responses to globalisation and then ranking countries in some way. I have done this exercise, joint work with Bill Branson and Jurgen von Hagen, which is applied to Poland, Czech Republic, Hungary and Slovakia and it has been published in The World Economy. I believe that Professor Kolodko has a copy of this and I can refer it to you as an example of how the globalisation and governance interaction plays in the specific cases of the candidates to the European Union membership. But rather than dwelling on this, I want to talk to you about research that I have just completed and that goes a little bit deeper into the way in which globalisation can improve governance.

By opening up your economy not only do you get the usual benefits that we know about in terms of international trade theory, but in addition you get a premium on good governance. To be very specific, I can show that greater import openness has about the same effect on lowering corruption, as GDP growth (Macedo 2001 and Bonaglia, Braga de Macedo and Bussolo 2001, reproduced in the Appendix). That is a very important result because it shows that, contrary to what you may think or what public opinions or markets may think, good governance is not a privilege of rich and of the countries that have been rich for quite some time. This is a result that allows us to counter head-on geographical and historical determinism. If you start looking on a panel with many countries, you find that countries that are Anglo-American and have been richer in the past are more likely to have good quality of institutions, greater openness and so on. You get a little bit perplexed because you think that if you happen to be in the middle of Africa or in Central Asia, there would be no hope, maybe if you wait for 300 years. That is not very comforting. It may be more comforting for you guys who are younger, but still we will agree that 300 years is beyond your horizon.

Our result shows that if there are policies of opening up to trade their effect on governance, an important dimension – the corruption indicator - is comparable to that of the income level. There is something you can do about good governance, there is something you can do about fighting corruption, that is much easier to achieve than hoping that you get the level of income of Belgium. And what is it? – to open up more. Rather than get into the details of the particular regression and the instruments that we have used, I want to leave you with their implications. As a result of the kind of research that we do, which is to apply econometric analysis to problems that worry policymakers the world over and worry public opinion, we can draw some broad policy implications.

Let me stress one more time that the results of the research are very much against geographic or historical determinism. Some say that there is one Europe of the wine and one Europe of the beer, that the Europe of the beer is developed and the Europe of the wine is underdeveloped, and that is just the way it is. Well, according to our results, it is not.

There are many things governments can do to improve governance. One of them is to open up to trade and to capital movements. Our result, the one I reported to you, is about trade but we have a similar result about capital movements even though the coefficient is slightly smaller. Once again I do not want to get into technical details but I am sure that in the question-and-answer period there would be questions about that from Professor Ko?odko, if not anybody else. Thank you very much for your attention.

G. Ko?odko: Thank you very much Professor Macedo.

Now we can go back to the panel. After these three presentation and especially the keynote address by Professor Braga de Macedo we have time for discussion, questions and answers, comments on what has been said and what has been not said but is very much related to the topic of both the cases of small open economies in transition to the market, that is the case of Hungary and big, opening but still not open enough economy in transition to the market which is Russia and development issues, seen as Professor Braga de Macedo has proposed it. Who would like to take the floor first?

Marcin Pi?tkowski: Do you see a role for OECD, if any, in tackling the specific problems of particular countries rather than only theoretically showing the right way? We all know that in order to, for instance, promote the new economy, we should lower the cost of access to the Internet, improve technological infrastructure and so on. How then can OECD help to tackle the specific issues within the post-socialist countries, particularly with regard to implementation of the prescribed policies? Especially that, as you said, families with bad histories may have entirely different backgrounds.

Vito Tanzi: I would like to make a comment on Professor de Macedo`s point about institutions. I am interested in your reaction, whether you agree with what I am going to say. I have always been impressed by the fact that economics has been developed mainly in the Anglo-Saxon world, in the US and in the UK. These two countries essentially have very stable institutions. Institutions in the US have not changed very much for hundred or two hundred years and in the UK even longer than that. It means that the institutions could be taken for granted. You do not have to worry about them. Furthermore, institutions pretty much worked. In the US when you talk about tax policy you do not have to worry whether the Internal Revenue Service will be able enforce the law or not - you take it for granted. When you talk about the Treasury you do not worry whether the Treasury will be able to track expenditure - you take it for granted. Much of economics has developed assuming institutions as constant. When we come to transition economy, when we come to developing country that assumption is no longer valid. Institutions become tremendously important, become actors in all the processes. Now we have a little bit of change on this. Amartya Sen and Douglas North get the Nobel Prize but if you look at North’s work it still reflects pretty much American tradition. They are not talking about the conflict between the tax policy that decides something and tax administrations that can not deliver it. This kind of conflict is very frequent. To some extent we need to really have more involvement in economics on the part of other countries beside the US. It is true that Poles or Indians or Italians, they go to the US but when they get there they begin to behave exactly like the others. If George was at Princeton, I am sure he would not be saying what he is saying now. I am curious about your reaction thank you.

Daniel Hall: My question has to do with venture capital and the possibility of using venture capital as a development tool. This issue of reasonable development in a context of, I think, the Polish reality over the past several years has been very interesting. We have seen significant FDI flows going into the country, a lot of development happening in Warsaw and regional capitals but not much getting out to the countryside or underdeveloped areas. Can venture capital be used with support either from international financial institutions or potentially from the government itself, as we are seeing happen in the United States with community development financial institutions and new market’s initiatives. Is it a reasonable tool or sensible, logical tool to use venture capital supported by some public sector institutions, whether they are national or international, to try to stimulate job creation and development and improved governance in local enterprises, small and medium enterprises growing and developing. Thank you.

Grzegorz W. Kolodko: I want to ask you one question, which is loosely related to what you have said. Since you are the President of the Development Centre of OECD and we are a member of the OECD along with some other countries in transition, I then hope that we are not only gaining from being the member of OECD - there is also our contribution to the way of OECD thinking and reasoning. Now OECD is becoming a little bit more complicated organisation at the contemporary stage of globalisation when it has to deal with the problems of catching up development of highly developed market economies and developing economies in transition. Sometime we are developing faster than developed economies, sometime developed economies develop faster than we do. Actually how do you see the future of OECD, what is the role of OECD as an international organisation in debates about the design of the policies to support the growth in the global economy and stabilisation of the institutional restructuring, the institutional set up for the contemporary global economy which is so much different from what it used to be when OECD was brought to the fore.

Would you like make any points how you see from the OECD perspective and from your own perspective the redesigning of the institutional order which I think is far too short to deliver in relation to what we are looking for at this stage of so called globalisation and evolution of the world economy which is not any more what it used to be even a decade ago because of couple of processes we are discussing here. That is transformation, this is the emergence of the so-called New Economy and globalisation as such.

Tadeusz Kowalik: I would like to comment on the remark of Professor Tanzi about the importance of institutions. I see the Anglo-Saxon countries differently, too, not only because of the importance of institutions in transforming economies. Namely, I think that because of rapid institutional changes in the United States which can be called devolution, evolution from welfare state to social safety net, culture and the come-back of Schumpeterian capitalism as a civilisation of inequality. This causes a shift from the traditional neoclassical economics to new institutionalism, to the studies of the institutions in the Anglo-Saxon countries, too. There is an explosion of literature about inequality and so on. I think this is a world phenomenon, not only important for the transforming or developing countries.

Matti Pohjola: I would like to comment or ask about the development debate that is going on all over the world at the moment, the confrontation between finance ministers and NGOs and so on. I very much agree with your views on the role of development economics. Economics is all about development. But in the 1950s development economics addressed questions like imperfect competition, power. Economists were not perhaps able to model these things and that was one of the reasons that development economics as a discipline was not that popular in the 1960s and 1970s.

Coming back to the debates on globalisation and development, it seems to me that there is something that our models are lacking. When we, economists, talk about the impacts of trade liberalisation, capital movement deregulation, whatever, we think in terms of competitive markets but when NGO people talk about these issues, they think about the power that multinational companies have. It is very difficult to have a constructive discussion on the problems facing the economy. Is economics really addressing these issues by using the right models? There must be some truth in the claims that the activists in the NGO group present -the poverty has not been reduced recently and so on. What is your view or view at the OECD Development Centre about the role of economics as a discipline in addressing these questions?

Jorge Braga de Macedo: Let me address very briefly a very interesting question on venture capital, not to really answer it but to point to two consistent directions. There is a fair amount of work, especially at DELTA in Paris, about the role of matching structures from the labour market and from the capital market being the key to financial markets making their role in promoting development. Therefore venture capital, no matter how small, is a crucial dimension of that. That is why the support by the public sector can be increased, you did very right in doing it. It is not a panacea but if you look at experiences at EBRD and also in Africa as well, you can see that it fits well and manages to change the behaviour, especially in the banking system and therefore can be seen as compatible with, for example, micro-credit experience that EBRD has had in Russia. It can make a very substantial difference and I am with you there.

As regards the basic question that were asked about the OECD, about institutions and about the development, the confrontation, the Seattle, Prague and all that. Those are difficult questions. Let me address them head-on. The OECD has a very special role in the international architecture. Even though it deals mostly with economics, it does include some social departments - the Social Directorate is very, very active, but it deals mostly with economic analysis. Yet it is the only organisation in the world that does not have a lending or borrowing agenda either implicit or explicit. That is important in the world that we can contrast the analysis, we are not questioning the excellence of the research staff in the IMF or in the World Bank, to do so in this room would be extremely non-diplomatic, because two prominent economists have drawn a lot on the excellent quality of one of these institutions and the World Bank has been very active in many areas that I talked about – governance, fighting corruption and so on. The point of the matter is that there is a mandate, which is very operational. You have to solve the problems of the countries that come to the IMF for assistance and you have to solve the development problems of countries of the World Bank and you have to do so in an operational way. The OECD in this regard is a peer pressure organisation. A member country presents its views and it knows that another country will say: ‘By the way, I went through this experience, I had this particular solution, does it work with you? Does it not?’ As you said very rightly, with the entry of new members, Mexico, Korea, Poland, other formerly planned economies, the diversity increased and therefore the path of development rather than the state of high development becomes the most important challenge for the OECD. This is why I called it, the Secretary General was saying, the ‘D’ has come back because in the 1960s when the OECD was created or even before when it was called the OECE, it was only about Europe, the ‘E’ was replaced by ‘D’. During that time European countries were developing countries, they had been devastated by war. There was a sense of development of moving from one place to the next. Maybe this was a little bit lost and now, with the new countries, it is back. This is why, as I say, you must look at it not as a rich countries club but rather as a challenge of development. I do want to stress that this is unique in international order.

How do you redesign the order was another difficult question. I have a personal answer coming from my experience in Europe, with the European institutions, which has again to do with peer pressure. I find the procedures of surveillance that were adopted by the European Community in connection with union treaty, and this is not because I signed that treaty, it has to do with the profound belief that these procedures can work. It is much more exacting that IMF surveillance because IMF comes at a moment, very often of crises, you have to do things very quickly and very strongly whereas in the case of the European Community it had to do with making countries like Portugal or Italy understand that it was not in their interest to have high deficits. That is a much more profound objective and it requires more profound, more intrusive perhaps, but again more reciprocal types of surveillance which are now visible for example in structural issues, in competition and in very deep issues of national sovereignty. That is peer pressure. That is nowhere to be found in an institution that is lending or borrowing. The way to redesign institutional order to my mind would be a little bit Euro-centric. It would inspire itself in the model of Europe because countries need greater surveillance on structural areas. By the way, the IMF is already doing it. It is going more into banking sector reform, it is collaborating with the World Bank on this score. But still the best example of IMF intervention and successful intervention has to do with balance of payments problems, that is what they were born to do. This why also the World Bank has often been criticised for doing too many things, therefore not being able to do anyone sufficiently and effectively. My answer to your difficult question is as follows - if you take more inspiration in the willingness of countries to collaborate on a peer pressure basis, then you do better than if you continue with top-down schemes.

That is going to take me to the possible solution to the Prague and Seattle. Globalisation has acquired that dimension of excluding rather than including. We have done a lot of work at the Centre on the impact of globalisation on income distribution. It is very different. There are good cases and bad cases but the public image is that globalisation is really increasing inequality; it is creating a society of excluded people. This is why in our program we talk about inclusive globalisation. This perception must be fought, it must be fought with analysis, not with rhetoric. We are collaborating with the research department of the World Bank to investigate some aspects of NGO governance. Why do we want to investigate NGO governance? Because, for example, we know that out of one dollar of aid that leaves the OECD countries maybe only a quarter arrives in the countries in question. What about one dollar of aid from NGOs? We do not know. Here is the case where economic analysis of the traditional kind could be applied and help dispel some myths but still also emphasise some problems that have to be changed for globalisation to indeed lead to improved governance as I showed in my regressions.

Last but not least - the institutions. From one point, both Professor Kowalik and Professor Tanzi have mentioned them, maybe I should not add more. But Professor Tanzi had a provocative remark, just like I called you Mr Taxes, then I am sure you resented that because I know you fought for lower taxes. Very often I am known as Mr VAT in Portugal because I increased a little bit the rate and it was good for the people as was later shown by the central bank. When I was at Princeton my next door neighbour was Arthur Lewis. We were in a program called ‘Research Program in Development Studies’ and we specifically wanted to incorporate different institutions. Did we succeed? I do not know. Of course I was working on the economic side but I think it is fair to say that the idea of institutional stability has been abandoned even for Anglo-American countries.

Now change is the rule and my point is simply that economists can contribute as economists. The work I cited that I did with Jorgen von Hagen is a very interesting example in my opinion. He pioneered this. He set down with a lawyer (it is very important not to leave the lawyer alone because otherwise it becomes completely out of hand), they looked at the budget laws of various countries, then we applied this to Central Europe (See von Hagen and Harden 1994 and 1996). He tried to show in what way you could compare the procedures for the budget to be approved and then passed in parliament. Similar work to the one that was done by Cukierman (1992) and others about the central bank or about monetary institutions, very detailed work on corruption, on governance. We are doing this, we have indicators of structural reforms, the World Bank too. This is the kind of work I am talking about. That I think is useful not just for Poland, not just for Mexico, not just for Korea, to mention OECD member countries, but for the entire gamut, including the founding fathers. This is because I think that this stability of the Anglo-American countries is an illusion. Remember the civil wars in England; they killed each other constantly. It was maybe before Adam Smith. The point of the matter is that I think that there is a fair amount of stability but there is also a fair amount of instability. Just it turned out to be convenient for economists to put that at a side and concentrate on the level of income. That, of course, is the crucial point. These countries have a much higher level of income; this makes a difference. I am really glad, Professor Perminov, that you did not identify rich countries and rich families, because a family can be happy without being rich. Thank you.

Grzegorz W. Ko?odko: Thank you very much. I think it was very enjoyable.
 
 

The second stage regression results for import openness for the two samples used by Bonaglia, Braga de Macedo and Bussolo 2001 (depending on the source of the Corruption Perceptions Index adjusted to fall with corruption, where large covers yearly observation for 1984-00 in 140 countries and small covers 1980-85 average, 1988-92 average and 1995-00 yearly data for 99 countries) can be summarised as follows.

The regressions are in lin-log specification, meaning that the dependent variable, corruption, is in linear format and the independent variables are in logarithmic format. In this specification we can interpret the coefficients as the marginal effect on corruption of a change in the logarithm of the dependent variable, or, as the marginal effect due to a relative (percentage) change in the independent variable in linear format.

The prediction is that a 10% increase in imports openness results in 0.07-point change in the corruption score (0.74 x 0.1) in the larger sample, and in 0.2-point change (2.06 x 0.1) in the smaller one. This is a sizeable effect, especially when compared to the 0.13 and 0.12-point changes due to a 10% increase in log GDP per capita.

Instead of an arbitrary 10% change, it may in fact be more instructive to consider more realistic variations in the dependant variables such as their observed standard deviations. This exercise results in a 0.40 reduction of corruption (0.74 x 0.54) and a 1.11 reduction (2.06 x 0.54) respectively.

To isolate the direct impact of openness on governance we need to consider other important simultaneous determinants of corruption. Controlling for dependence on oil and mineral exports does not change the overall picture. In these specifications a high explicative power is achieved, even if not all the included variables are significant at conventional levels. The basic results concerning openness and corruption are unchanged: the magnitude of import and capital openness is slightly increased and the coefficients remain statistically significant.

Interestingly enough, while dependence on natural resources turns out to be a significant determinant of higher level of corruption, ethnic fractionalisation is never significant, nor has the expected negative sign.

Policy variables are also introduced as potential explanations of corruption. When an index of trade policy liberalisation, available for the last period only, is introduced, basic findings are unchanged, but the impact of the new variable turns out to be not significantly different from zero. This result may at first appear surprising given the positive correlation index observed between the two variables. However, protection as proxied by the liberalization index is fairly low for the most recent period we consider in our samples. Indeed, other authors examining the effects of average protection and its sectoral dispersion have found very weak results confirming that trade protection may have some non-linear effect that become significant only above certain levels.

Conversely, the extent of government intervention, approximated by government consumption as a share of GDP, is highly significant in both samples, but its effect on openness differs greatly. Using the smaller sample, openness remains significant and sizeable; conversely, with the larger one, it seems that introducing government size among the regressors makes openness’ effect on corruption much smaller and statistically insignificant.

Capital openness is another important determinant of domestic governance and we replicated the above-described estimations using instrumented capital openness instead of import openness. Compared to import intensity, capital openness has a smaller impact on corruption. A 10% increase in capital openness results in a 0.05 and 0.11 reduction of perceived corruption in the larger and smaller sample respectively. Considering a one standard deviation increase in the log of GPKF, corruption is reduced by 0.65 point (0.48 x 1.36) and by 1.25 points (1.06 x 1.18) respectively.

Bonaglia, Federico, Jorge Braga de Macedo and Maurizio Bussolo How globalisation improves governance, draft, OECD Development Centre, March 2001

Branson William, Jorge Braga de Macedo and Jurgen von Hagen Macroeconomic policy and institutions in the transition towards EU membership, Central Europe towards Monetary Union: Macroeconomic Underpinnings and Financial Reputation, edited by Ronald MacDonald and Rod Cross, Boston: Kluwer Academic Publishers, 2001, pp. 5-30.

Cukierman, Alex, Central Bank Strategy, Credibility and Independence: Theory and Evidence, The MIT Press, Cambridge, MA, 1992

Grossman Gene, editor Economic Growth Theory and Evidence, London: Edgar Elgar, The International Library of Critical Writings in Economics series 68, 1996

Lucas, Robert E. Why Doesn't Capital Flow from Rich to Poor Countries?, American Economic Review, May 1990, pp. 92-96

Macedo, Jorge Braga de Converging European Transitions, The World Economy, vol 23 no. 10, November 2000, pp.1335-1365.

Macedo, Jorge Braga de 263. Globalisation and institutional change: a development perspective, paper presented at the 7^th plenary session of the Pontifical Academy for the Social Sciences, Rome: The Vatican, April 2001

Von Hagen, Jurgen and Ian Harden, National Budget Processes and Fiscal Performance, European Economy: Reports and Studies 3, 1994, pp. 311-418

Von Hagen, Jurgen and Ian Harden, Budget Processes and Commitment to Fiscal Discipline, IMF Working Paper, 1996