Publications

2005
Hausmann, R., Rodrik, D. & Rodriguez-Clare, A., 2005. Toward a Strategy for Economic Growth in Uruguay. Publisher's VersionAbstract
The Uruguayan economy is recovering from the 2002 financial crisis that disrupted its banking system, caused a collapse of its currency and seriously affected its fiscal solvency. The crisis was clearly associated with the collapse of the Argentine economy and its concomitant currency, banking and debt crises. Both were also related to the sudden stop that followed the Russian crisis of 1998, which prompted an important realignment of the real in January 1999, a fact that had exerted enormous pressure on bilateral exchange rates within Mercosur. In this post-crisis period, Uruguay now faces several challenges to attain a sustainable growth path. This report proposes a series of recommendations towards this end. Implementing a strategy to accelerate growth inevitably involves interventions at both the macro and the micro level. The macro level involves the maintenance of a stable and competitive real exchange rate, so as to create a stable and encouraging environment for export growth. The authors take up each of these elements of the growth strategy. They first focus on the design of incentive policies for economic diversification and promotion. Then they discuss next the macroeconomic complements, with special emphasis on maintaining a competitive and stable real exchange rate.
towards-strategy-economic-growth-uruguay.pdf
Rodrik, D. & Hausmann, R., 2005. Self-Discovery in a Development Strategy for El Salvador. Economia , 6 (N1).Abstract


El Salvador is a star reformer. After the civil war of the 1980s, the country was able to adopt important political and institutional reforms. These included the incorporation of all political groups into the electoral process, the adoption of a new constitution, the elimination of the military police, the creation of a civilian police with members from both sides of the war, and the adoption of rules to strengthen the independence of the judiciary. On the economic front, the country consolidated its fiscal position, modernized its tax system, liberalized trade and banking, improved the regulation and supervision of its financial system, privatized most state productive assets including energy and telecommunications, and reformed its social security system in line with the Chilean model. It also expanded and granted local autonomy to the school system through the Community-Managed Schools Program (EDUCO). Finally, El Salvador dollarized its financial system in November 2000. Given the investment-grade rating earned by the country, domestic money market rates have converged to U.S. levels.

Unfortunately, El Salvador is not a star performer. Standard theory would predict that such an improvement in the institutional and regulatory environment should be followed by convergence to a higher income level. Instead, after an initial period of recovery that lasted until 1997, real gross national income per capita stagnated at levels comparable to those achieved by the country in the late 1970s. Its income relative to the United States has not recovered from the fall associated with the civil war and is just over half the ratio achieved in the late 1970s.

El Salvador is not alone in finding that reform efforts have had smaller-than-expected
growth effects. With the exception of Chile, the effects of reform ongrowth throughout Latin America have been smaller than the initial estimates carried out in the mid-1990s.In this context, El Salvador is an interesting case, since it has been particularly effective in applying wide-ranging reforms.

This paper explores why these reforms have failed to produce more growth and what can be done about it.2 We begin by placing the economic choices faced by the incoming Salvadoran administration in a regional and historical perspective. The late 1980s and early 1990s in Latin America were preceded by a decade of stagnation, but coincided with a time of unusual confidence in the future. The collapse of communism, the failure of many interventionist policies in Latin America in the 1980s, and Chile’s success gave governments a clear idea of the road they wanted to leave and the road they wanted to take. Inadequate past performance and consensus on the road ahead led to a forceful policy agenda.

discovering-el_salvador-production-potential.pdf
Hausmann, R., Rodrik, D. & Velasco, A., 2005. Growth Diagnostics. growth-diagnostics.pdf
2004
Hausmann, R. & Purfield, C., 2004. The Challenge of Fiscal Adjustment in a Democracy: The Case of India.Abstract
India’s fiscal problem has deep roots in its federal fiscal system, where multiple players find it difficult to coordinate adjustment. The size and closed nature of the Indian economy, aided by its deep domestic capital market and large captive pool of domestic savings, has disguised the cost of fiscal laxity and complicated the building of a consensus on reform. The new fiscal responsibility act establishes a new rules-based system to overcome this coordination failure. To strengthen the framework, we recommend an autonomous scorekeeper and the extension of similar rules to the state governments as part of a comprehensive reform of the federal system.
_wp04168.pdf
2002
Hausmann, R. & Rodrik, D., 2002. Economic Development as Self-Discovery.Abstract
In the presence of uncertainty about what a country can be good at producing, there can be great social value to discovering costs of domestic activities because such discoveries can be easily imitated. We develop a general-equilibrium framework for a small open economy to clarify the analytical and normative issues. We highlight two failures of the laissez-faire outcome: there is too little investment and entrepreneurship ex ante, and too much production diversification ex post. Optimal policy consists of counteracting these distortions: to encourage investments in the modern sector ex ante, but to rationalize production ex post. We provide some informal evidence on the building blocks of our model.
2002_econ_development_self_discovery_hausmann_rodrik.pdf
Hard Money's Soft Underbelly: Understanding the Argentine Crisis
Hausmann, R. & Velasco, A., 2002. Hard Money's Soft Underbelly: Understanding the Argentine Crisis. Brookings Trade Forum , pp. 59-104. Publisher's Version

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