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Monday, November 12, 2007

Dani Rodrik Seminar at Crooked Timber

I am part of a seminar at Crooked Timber on Dani Rodrik's new book One Economics, Many Recipes: Globalization, Institutions and Economic Growth. My entry is at the end of this batch, but do read the others as I'm sure they are much better, and there will be more entries posted tomorrow along with Dani Rodrik's response. The first day's entries are more descriptive so that people who haven't read the book can get a better idea of what it is all about, though they do have points to make, while the the second batch focuses on more specific criticisms:

Introduction: Dani Rodrik Seminar, Crooked Timber, by Henry Farrel: Dani Rodrik’s new book, One Economics, Many Recipes: Globalization, Institutions and Economic Growth ( Powells, Amazon ) is a major contribution to debates on globalization, economic development and free trade. It brings together much of his existing work bringing together an important critique of the Washington Consensus with positive suggestions about how best to encourage economic growth, and how to build a global system of rules that can accommodate diverse national choices. We’re pleased and happy that both Dani and several other guests have agreed to participate in a new Crooked Timber seminar. This seminar will be published in two parts – the first today (featuring Henry Farrell, John Quiggin, Mark Thoma and David Warsh), the second tomorrow (featuring Daniel Davies, Dan Drezner, Jack Knight, Adam Przeworski, and Dani’s reply post). As with previous Crooked Timber seminars, it is published under a Creative Commons license (see below). Tomorrow, I will post a PDF of the entire seminar (plus a LaTeX file for anyone who wants to play around with it). If you have specific comments about the contributions, please post them in the relevant comments section for the specific post. For general technical glitches etc, post comments here.

The (non-CT regular) participants in the seminar are, in alphabetical order:

(1) Dan Drezner blogs at http://www.danieldrezner.com/blog/. He is an Associate Professor at the Fletcher School of Law and Diplomacy, at Tufts University. He has written two academic books on international political economy (looking at sanctions and globalization), as well as a Council of Foreign Relations report and numerous articles. He possesses specific expertise on the intersection between celebrity culture and global politics.

(2) Jack Knight is Sidney W. Souers Professor of Government at Washington University in St. Louis. He is author of a widely cited book on institutional theory, Institutions and Social Conflict as well as numerous articles. He has a new book co-authored with Jim Johnson on rational choice, pragmatism and deliberative democracy, which will be published next year.

(3) Adam Przeworski is Carroll and Milton Petrie Professor of European Studies and Professor of Politics at New York University. He is the author of several monographs and numerous articles on topics including social democracy, democratic transitions and economic development. This interview (previously discussed in this CT post) gives a good overview of his life, politics, and academic work.

(4) Dani Rodrik blogs at Dani Rodrik’s Weblog. He is Professor of International Political Economy at the Kennedy School of Government of Harvard University, where he teaches on international development issues. He has written two books, copious numbers of academic articles and policy papers, and was recently awarded the inaugural Albert O. Hirschman Prize of the Social Science Research Council.

(5) Mark Thoma blogs at Economist’s View, which has quickly become established as one of the key forums for debate of economics and politics on the Internet (with occasional interjections by Paul Krugman and others). He is professor of economics at University of Oregon, where he has published numerous articles on aspects of macroeconomics theory.

(6) David Warsh is the editor of Economic Principals. He previously covered economics issues for The Boston Globe and Forbes Magazine for 25 years, and is the author of a widely acclaimed (and rightly so) intellectual history of the new growth theory in economics, Knowledge and the Wealth of Nations

This work is licensed under a
Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License.

Through the Hourglass by David Warsh: From his title on, Dani Rodrik is at pains to identify himself as a neoclassical economist, bred in the bone. He writes, “If I often depart from the consensus that ‘mainstream economists’ have reached in matters of development policy, this has less to do with different modes of analysis than with different readings of the evidence and with different evaluations of the ‘political economy’ of developing nations.” Not to start an argument, if the book were about professional cooking, he might have called it One Chemistry, Many Recipes (and Plenty of Chefs). True, economics is not very much like chemistry, but the reason for Rodrik’s emphasis on the primacy of theory, I think, has less to do with the presence of economics’ many competitors in the development game – political scientists, sociologists, lawyers, business executives, savants of all sorts—than with what happened in mainstream economics itself in the twenty-five years since he began his career. » Continue reading “Through the Hourglass.”

More Politics, Many Recipes, by Henry Farrel: A good way to start thinking about Dani Rodrik’s genuinely excellent new book is to contrast its statement of objectives with a programmatic statement from another new book on international economics, Roberto Unger’s Free Trade Reimagined.

First of all, Rodrik:

First, this book is strictly grounded in neo-classical economic analysis. At the core of neoclassical economics lies the following methodological predisposition: 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. This I find to be not just a powerful discipline for organizing our thoughts on economic affairs, but the only sensible way of thinking about them. If I often depart from the consensus that “mainstream” economists have reached in matters of development policy, this has less to do with different modes of analysis than with different readings of the evidence and with different evaluations of the “political economy” of developing nations. The economics that the graduate student picks up in the seminar room – abstract as it is and riddled with a wide variety of market failures – admits an almost unlimited range of policy recommendations, depending on the specific assumptions the analyst is prepared to make … the tendency of many economists to offer advice based on simple rules of thumb, regardless of context (privatize this, liberalize that), is a derogation rather than a proper application of neoclassical economic principals

» Continue reading “More Politics, Many Recipes.”

If so many recipes can work, why do so many fail?, by John Quiggin?: Dani Rodrik’s book opens with a discussion of the policy approach that dominated the development debate for much of the 1990s, and to some extent still does. The term ‘Washington consensus’ was coined by John Williamson of the IIE, to described the views of Washington-based institutions (IMF, World Bank and US Treasury in the 1980s, but escaped from its creator and came to encompass a program of dogmatic adherence to a revived version of 19th century economic orthodoxy, commonly referred to as neoliberalism. » Continue reading “If so many recipes can work, why do so many fail ?.”

Setting the Stage for Growth, by Mark Thoma: Dani Rodrik’s new book, One Economics, Many Recipes: Globalization, Institutions, and Economic Growth takes on a problem of fundamental importance, how to stimulate and sustain economic growth in underdeveloped countries and lift people out of poverty.

Past attempts to solve this problem can, for the most part, be identified with one of two polar extremes, solutions that involve pervasive and persistent government intervention, and solutions that rely upon extreme laissez faire market-oriented policies. Neither of these approaches has been very successful, and the book argues for a different approach that combines these extremes and allows market forces to operate in an environment shaped by government policy. Under this combination approach the government in partnership with the private sector uses industrial policy and institutional change to strategically kick-start, coordinate, and sustain economic activity.

If the barriers to development are difficult to identify, what should you do? One approach is follow a set formula such as the Washington Consensus. This provides a recipe to follow that is grounded in economic principles, relies upon markets to direct development activity, and is intended to be robust enough to work in a wide variety of circumstances. Unfortunately, there is little evidence that such a formulaic market-based approach works across the broad sets of conditions and institutions that exist in undeveloped countries. And the opposite approach, a heavy-handed, top down, highly interventionist, dictatorial approach does not seem to be able to find the keys to successful growth either.

The message is that too much reliance on either the government or the private sector has not, in general, produced the desired outcome of sustained long-run growth. To overcome this, the book recommends prescriptions that improve the information flow between the private and public sectors to reveal the important barriers to development. This calls for a collaborative effort between the government and the private sector devoted to identifying and removing the biggest impediments to entrepreneurial activity. A main point of the book is that although there are certain broad principles that guide the choice of industrial policies and institutional design, there is no one recipe that works for all countries. The endpoint is sustained economic growth, and the prescriptions are firmly grounded in traditional economic principles, but the exact path a country takes to reach its long-run objectives depends upon its unique circumstances and generally involves a combination of orthodox and unorthodox institutional practices.

While the first stage seems relatively easy to bring about, getting to the second stage, i.e. sustaining growth, is more difficult (the book lists over eighty instances of growth spurts, but only a few of those have been sustained over a long time period). As the book says, “Sustaining growth is more difficult than igniting it, and requires more extensive institutional reform,” and much of the discussion in the book is devoted to explaining a systematic approach to institutional design that promotes the necessary dynamism to sustain growth over the longer term.

Unfortunately, the general principles that explain the difference between the countries who make it to the second stage and those who do not are unclear. One of the book’s messages is that such systematic differences are difficult to identify due to unique conditions in each country, but since making it to the second stage is the goal of development policy, I still wish we had a better sense of the factors that explain why most countries are unable to make the transitions needed to sustain economic growth.

Perhaps the book’s discussion of a paper by Imbs and Wacziarg (2003) in the section on institutional design is related to this problem of determining which countries will survive the transition into the second stage. The paper estimates a typical development pattern and finds that development follows two distinct stages, an initial stage where sectoral employment and production become less concentrated and more diversified, followed by a second stage where this reverses and there is increasing sectoral concentration as the economy grows. In addition, the turning point is estimated to occur, on average, at relatively high levels of per capita GDP. Thus, graphing sectoral concentration against GDP per capita reveals a U-shaped pattern and, as Imbs and Wacziarg stress, the U-shaped pattern “is an extremely robust feature of the data.” Based upon this they conclude that “Countries diversify over most of their development path”.

This conclusion is based in part upon the result that the minimum of the U-shaped development path is at a relatively high level of income, but there is quite a bit of variation in the minimum across countries (partly explained by openness), and it is lower after 1980. In addition, the minimum is the point when the forces that are increasing concentration begin to dominate the forces that are decreasing it, but that is not necessarily the point where these forces begin to change.

What I am suggesting is that perhaps this process of clearing out unproductive, unprofitable firms is an essential part of getting to the second stage, and that this process must begin fairly early in the development process, earlier than the minimum point of the U-shaped curve. Initially, the clearing out doesn’t fully offset the growth spurt and there is increasing sectoral diversification overall, but eventually the forces of consolidation come to dominate the forces of diversification as successful firms gain strength and this causes sectoral diversification to end as the economy passes by the minimum point on the U-shaped development curve. Without this process in place to clear the path for stronger firms to emerge, and without it beginniing fairly early in the devekopment process, growth stagnates before the country ever reaches the minimum point on the U-shaped development curve.

Perhaps it is the failure of this cleaning out process to operate due to government ownership of some firms, government protection of certain favored sectors, regulation, labor restrictions, etc., that is a factor in preventing countries from getting to the second stage. The book recognizes barriers such as these can impede development and one of the key guiding principles the book gives for partnerships between the public and private sectors, and in building institutions to support growth is the creation and preservation of ‘dynamism.’ In this regard, among countries experiencing growth spurts, it might be interesting to find out what the sectoral concentration profiles look like for the countries that were able to make it to the second stage versus those that did not, particularly a comparison of measures such as exit rates. More broadly, however, the question is whether there are deeper connections between the U-shaped concentration curve that appears to provide a very robust characterization of the growth profile of developing countries, and the first and second stages of growth identified in the book.

And this brings me to my last point. Whether or not there’s anything to the conjecture above about stagnation due to the inability to clear out unproductive elements in the economy, a bigger message is that we need to learn more about the connections between the first and second stages of growth, i.e. about the transition itself. For example, what if removing the one or two most important impediments to jump-starting economic growth in the short-run is not the best means of getting to the second stage, or leads to a dead end where you cannot get to the second stage at all? Maybe some other development strategy involving the second and third most important barriers, say, won’t give quite as much boost initially, but gives the country a much better chance of surviving the transition and sustaining growth over the longer term. The example is simplistic, but the point is that this is a single, interconnected problem, not two separate problems, and the first stage must be devoted to bringing about a successful transition to the second stage. The book does a great job of listing the guiding principles for each stage, and of describing how to design institutions to sustain growth, but I would like to see the connections between the two stages, particularly how to set conditions in the first stage so as to make the second stage more likely, explored in more depth. As noted above, the kick-start phase seems relatively easy to bring about and there are scores of instances of this happening, but getting to the second stage is much more difficult and perhaps there is more that can be done to enable the transition to take place. In any case, since so many countries fail after growth is initiated, the transition is something we need to learn more about and this book provides a solid foundation from which to explore this issue further.

    Posted by on Monday, November 12, 2007 at 09:45 AM in Economics, International Trade, Policy | Permalink  TrackBack (0)  Comments (3)


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