A talk with Ricardo Hausmann

Ricardo Hausmann, Director of the Center for International Development in Harvard University, visited the Asian Development Bank (ADB) to present his latest research on development as a process of learning to produce and export sophisticated products. He first met with the economists before lunch time, and I indulged myself in listening to the excellent development economist.

I have not particularly seen the actual paper or presentation itself, but I recon that it is related to Professor Hausmann's 2005 paper with Jason Hwang and Dani Rodrik ("What you export matters," CID Working Paper no. 123, December 2005, Harvard University Center for International Development), which is driven by his earlier work with Professor Rodrik in 2003 ("Economic development as self-discovery," Journal of Development Economics 72: 603-33; an earlier NBER version can be downloaded here). Basically, it's not enough that countries should promote policies that would increase access to foreign trade and investment and imported capital equipment and intermeiate goods (access to state-of-the-art technologies) as well as secure property rights (good governance). Learning what one is good at in terms of which products to produce is an equally important determinant of structural change. Some traded goods are associated with higher productivity levels than others and that countries that latch on to higher productivity goods will perform better. This process of product specialization involves entrepreneurs exploring and discovering the underlying cost structure of the economy.

The problem is is that this discovery process is unlikely to be adequately provided under laissez-faire. As Professor Hausmann's 2003 paper notes:

"... [L]aissez-faire leads to underprovision of innovation. Governments need to play a dual role in fostering industrial growth and transformation. They need to encourage entrepreneurship and investment in new activities ex ante, but push out unproductive firms and sectors ex post."

Professor Hausmann didn't actually discussed much about his presentation, but opened the forum for questions regarding any of his latest research. Among which is his work on growth diagnostics. His most significant insight was how it relates to the Washington Consensus. Coined by John Williamson in his 1990 work, "Latin American Adjustment: How Much Has Happened?" (Washington: Institute for International Economics), the Washington Consensus is a list of ten policy reforms he suggested as needed for Latin American countries hit by the debt crisis of the 1980s:

1. Fiscal discipline
2. Reordering public expenditure priorities
3. Tax reform
4. Liberalizing interest rates
5. A competitive exchange rate
6. Trade liberalization
7. Liberalization of inward foreign direct investment
8. Privatization
9. Deregulation
10. Property rights

So, Professor Hausmann mentioned that each of these are well and good, and may actually result to positive outcomes to countries. His whole point, however, is obvious in the title. Williamson meant for these reforms to be applied to Latin America only. So Professore Hausmann, like other economists, was surprised that multilateral agencies such as the World Bank and the International Monetary Fund adopted the Washington Consensus as the generic solution to all economic problems faced by developing nations. Professor Hausmann stressed that these policy recommendations have to be taken into context. What is really needed is to sit down, ask specific questions to a development country, and get down to the details on what is actually going wrong. And so the growth diagnostic literature is born.

For a retrospective view of the Washington Consensus, here's what John Williamson himself has to say.