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Policies, institutions and convergence - discussion

Jorgen Elmeskov, OECD Economics Department

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Three simple points

Convergence depends on structural policy settings (as well as on macro)

The structural policy settings consistent with convergence keep changing

Hence, the ability to adapt structural policy settings may determine whether countries converge– > Need to consider political economy factors

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Convergence depends on structural policy settings

OECD growth study and related empirical research has provided evidence

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The structural policy settings consistent with convergence keep changing

As countries catch up, different structural policies may be required– E.g. IPR protection may be more important closer to the

technological frontier As the external environment changes, structural policy settings

may also have to change– E.g. entry barriers as a result of product market regulation may be

more of a drag when technology is in flux; likewise for job protection Structural policies may have to change as our understanding of

optimal policy design develops– E.g. understanding that some segments of network sectors are

competitive

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The ability to adapt structural policy settings may determine convergence

Structural reforms tend to destroy rent and are therefore resisted

Many factors affect the ability to reform. Most are difficult to predict long in advance as needed for convergence scenarios (e.g. economic crisis, fiscal situation, spillovers between reforms)

Other factors may be more slow-moving but our understanding is too limited to take them into account in convergence scenarios (e.g. political institutions, integrity of institutions, factors underlying consensus)

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Conclusion

The political economy influences on convergence are difficult to make operational in scenarios

But that does not prevent them from being important, e.g.– full catch-up of Europe and Japan to the US was widely

expected in the 60s but things turned out differently– the imminent slowdown of the Celtic Tiger has been

predicted for as long as anybody can remember