Diversity of Policies for Growth
jaime ros
T
After an introduction that states the proposition just mentioned in the previous paragraph and summarises the main arguments contained in each chapter, the first part of the book focuses on the past economic growth experience and its lessons for policy design. Chapter 1 develops several arguments. The first is that the economic growth experience of the past few decades appears incomprehensible through the lens of the Washington Consensus: The experience of the high performing east Asian countries, China’s boom since the late 1970s, India’s performance since the early 1980s, Latin America’s growth slowdown and Africa’s economic decline in the market reform and postreform periods may be consistent with some of the higher-order economic principles, but do not fit well with the particular list of reforms advocated by the Washington Consensus. This leads Rodrik to one of his central points: the fact that there is an indeterminate mapping from economic principles to institutional arrangements. China’s “transitional institutions”, industrial policy in South Korea and Taiwan, the internal organisation of the workplace in Japan, and the dual track in Mauritius trade policy are some illustrations. The
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One Economics, Many Recipes: Globalisation, Institutions and Economic Growth
by Dani Rodrik; Princeton University Press, 2007; pp xii + 263; $ 35.00.
chapter then summarises the stylised facts of the growth record and develops the argument that getting economic growth started requires a relatively narrow range of policy reforms (both orthodox and unorthodox) compared to the more extensive institutional reforms that are needed for sustaining growth over a long period. The practical implication of failing to distinguish between these two tasks is to leave policymakers with an overambitious and unworkable list of reforms.
Removing the Constraints
Chapter 2 then turns to how to get growth started. This is a co-authored article with Ricardo Hausmann and Andrés Velasco on growth diagnostics, which revives an old tradition in development economics – that of looking at the binding constraints on growth and basing policy recommendations on the removal of these constraints. But it not only revives an older approach present, for example, in two-gap and three-gap models of economic growth. Rodrik and his coauthors propose an original way, in the form of a decision tree, of going about identifying the most binding constraints on growth or, to be more precise, on physical capital accumulation. Summarising very briefly, capital accumulation may be constrained by inadequate social returns (due, for example, to lack of infrastructure or human capital), by a large wedge between social and private returns (associated, for example, with information and coordination externalities or with government failures) or by a high cost or lack of availability of finance for domestic investment. One important omission in this discussion is the real exchange rate, which may play an important role in igniting growth as Rodrik’s work elsewhere on growth accelerations clearly demonstrates [Hausmann, Pritchett and Rodrik 2005]. The chapter also illustrates
the application of this methodo logy by looking at growth constraints in El Salvador, Brazil and the Dominican Republic.
Chapter 3 is a short essay that brings together the main issues discussed in the first two chapters. It goes back to the point that regional disparities in growth performance do not match up well with the liberalising reform efforts and answers the counterarguments of advocates of the Washington Consensus – such as that reforms have not gone far enough or that it takes time for reforms to show their positive effects. What is then the alternative to the standard approach? Not an alternative policy reform agenda, but rather a threestep approach to a growth strategy. The first step is a growth diagnostics as outlined in Chapter 2. The second involves policy design, i e, formulating policies well adapted to local circumstances with the objective of targeting the identified binding constraints on growth. The third refers to the tasks of sustaining growth over time through institutional reforms that ensure economic diversification and the strengthening of domestic institutions of conflict management that prevent growth from collapsing in the face of external shocks.
What are the institutional implications of all this? This is the subject of the second part of the book. Chapter 4 reviews the main arguments for industrial policy including technological externalities, informational spillovers involved in discovering the cost structure of an economy and the coordination of investments in activities with scale economies. The chapter emphasises the last two that result in the underprovision of entrepreneurship in developing countries. It then turns to the institutional arrangements for industrial policy, understood not as the activity of picking winners by the government but as a process of strategic collaboration between the private and public sectors with the aim of identifying new activities that
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lead to the diversification of the economy. The chapter closes with a lengthy review of current industrial policies, largely focused on promoting exports and attracting foreign investment, and argues for the need to reorient them in the direction advocated by Rodrik.
Types of Institutions
Chapter 5 discusses five types of institutions required for the well functioning of markets: property rights, regulatory institutions, institutions for macroeconomic stabilisation, institutions for social insurance, and institutions for conflict management arguing that desirable institutional arrangements in each case vary across countries and over time. The chapter then provides a case for democracy as a metainstitution for building good institutions, institutions that are sensitive to local knowledge and needs. The argument is that participatory political systems are the most successful mechanism for aggregating and processing local knowledge. The chapter ends presenting extensive evidence that democracies deliver higher quality growth than non-democracies. By higher quality growth the author understands growth that is more predictable, less unstable, more resilient to adverse shocks and associated to more equitable distributional outcomes.
Chapter 6, ‘Getting Institutions Right’ reviews current debates on the role of geography and institutions, including the legacy of colonialism, in determining long- run growth. The chapter emphasises the centrality of institutions without precluding an important indirect role for geography through the influence on institutions of the type of resource endowment and abundance of natural resources. It also goes back to some recurrent themes of the book such as the point that institutional functions do not map into unique institutional forms and that to ignite growth large-scale institutional reform is rarely necessary.
Global Federalism?
Part three is on international economic integration. Chapter 7 addresses problems related to the governance of globalisation. The main and very insightful argument is that the world economy is today caught in an international trilemma. Of three desirable things, international economic integration, the nation state, and mass politics (democratic politics with a high degree of political mobilisation), we can have at most two. If we want deep international economic integration we can combine it with either the nation state, in which case the domain for mass politics becomes considerably restricted (the result is a “golden straitjacket” in economic and social policies), or with mass politics, in which case we give up the nation state in favour of global federalism, understood as deep international integration combined with a domain of mass politics that is truly global. Similarly, combining the nation state with mass democracy requires restricting the degree of international economic integration (what Rodrik calls the Bretton Woods compromise). Rodrik’s analysis favours global federalism as the most desirable long run outcome. For the short to medium term he suggests a compromise, analogous to the Bretton Woods compromise, between democracies with enough space to meet domestic objectives that are shaped by mass politics and institutions of global governance with appropriate mechanisms of escape clauses and optouts that can reap much of the benefits of international economic integration.
Chapter 8 addresses the question of how would a world trade regime that maximises development potential (rather than trade per se) look like. That maximising trade is not the same as maximising development potential is the starting point of the discussion. Here Rodrik draws on his extensive research on the subject to argue that deep trade liberalisation has not been shown to systematically deliver higher rates of economic growth and therefore does not deserve the high priority given to it by multilateral organisations [see, in particular, Rodriguez and Rodrik 2001]. The chapter then develops the principles that should guide a development-friendly reform of the world trading system, one that preserves developing countries’ policy autonomy while at the same time addresses developed countries concerns for maintaining high labour, social and environmental standards at home. These principles include viewing trade as a means to an end rather than an end in itself, trade
march 15, 2008
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rules that allow for diversity in national institutions and standards, granting different trade privileges to democratic and non-democratic countries, countries’ autonomy to protect their own institutions and development priorities, and that countries should not have the right to impose their own institutional preferences on others. An implication of all this is that the WTO should become an institution that manages institutional diversity rather than imposing institutional uniformity.
Diversity of Experience
The book closes with a very short essay titled ‘Globalisation for Whom?’ that makes two points. First, it recalls that those countries, such as China, India or Vietnam, that have more successfully integrated into the world economy and have made more progress in reducing poverty have followed unconventional development strategies while those, such as most Latin American countries, that have gone further in liberalising trade and capital flows have had a disappointing development performance. Second, the essay points to an asymmetry in the current process of globalisation in that international labour mobility, which has the potential of reducing poverty to a greater extent than further trade and capital account liberalisation (even accepting the optimistic estimates of the benefits that the WTO agenda is expected to bring), has been relegated in the global development agenda.
I have learnt much from the essays contained in this book and find them generally convincing. One caveat is that the view that Rodrik takes of neoclassical economics makes it undistinguishable from economics tout court. Thus, in the introduction to the book Rodrik characterises the methodology of neoclassical econo mics as the view that “social phenomena can best be understood by considering them to be an aggregation of purposeful behavior by individuals – in their roles as consumer, producer, investor, politician, and so on – interacting with each other and acting under the constraints that their environment imposes” (p 3). Yet, it is clear to me that Rodrik’s approach to growth, for example, with its focus on the binding constraints on growth, differs quite radically from what is usually called neoclassical growth theory which attempts to identify universal determinants of economic growth while focusing exclusively on the supply side of the economy. Because this is a caveat that goes back to the very title of the book, it may not be an unimportant one.
Email: ros@nd.edu
References
Hausmann, R, L Pritchett and D Rodrik (2005): ‘Growth Accelerations’, Journal of Economic Growth, No 10, pp 303-29.
Rodriguez, F and D Rodrik (2001): ‘Trade Policy and Economic Growth: A Sceptic’s Guide to the Cross National Evidence’ in Ben Bernanke and Kenneth S Rogoff (eds), NBER Macroeconomics Annual 2000, MIT Press, Cambridge.
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