One Economics, Many Recipes: Globalization, Institutions, and Economic Growth

September 2, 2010 | By In Article |

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5 Comments so far

  1. John R. Lott Jr. on September 2nd, 2010

    I might not agree with significant parts of the book, but it is interesting and, as is true with Rodrick’s work generally, it makes one think. I suppose that the most problems that I had were with Chapter 4 on industrial policy. Take the issue of Coordination Externalities. There are large areas of the US market economy where these activities have been coordinated without government involvement (e.g., gasoline stations and cars, bee hives and farms or groves, the development of private highways during the first century and a half or so of US history, radio and television (coordinating stations and people who can listen to them), coordinating telephone exchanges, etc). Often government intervention has slowed or harmed that coordination. Do I agree that in theory that greenhouses and electrical grids go hand in hand? Sure. But it is not clear to me why the problem isn’t that in some places the government is the one making these decisions. To me that would have been the hard question to answer. Anyway, I found the book interesting.
    Rating: 5 / 5

  2. D. Watson II on September 2nd, 2010

    Though it’s largely a reprinting of a group of previously published essays that fit well together, One Economics, Many Recipes: Globalization, Institutions, and Economic Growth by Dani Rodrik helped me understand how he would apply his principles of “diagnostic development.” The first section (3 chapters) lays out the case that successful countries develop using different strategies that may or may not follow standard prescriptions, with the emphasis on NOT. This sets up the second section (2 lengthy chapters plus a very short summary) on what industrial policy and governance institutions look like in the context of diagnostic development. The final section – a little less-well integrated with the other two – expounds on the lessons of different policies for the case of globalization.

    I find myself in large agreement with the overall diagnostic principle, which says that we as economists should identify the most binding constraints on an economy’s growth and develop context-appropriate policies to deal with that particular constraint. He argues that one of three basic problems likely to lead to low investment: low social returns, low private appropriability of those returns, or high costs of finance. Each of these might have several causes. You go through the country’s (or sector’s) statistics to determine where the constraint is likely to be. If interest rates, capital account deficits, and the returns to investment are very high, like Brazil, it’s probably the high cost of finance. He narrows it down further to the low availability of domestic savings. In El Salvador, on the other hand, interest rates and returns to human capital are low, taxes and corruption are low, there’s macro stability and good property right protection … leaving by a process of elimination that there is a lack of entrepreneurship and new ideas that is inhibiting growth there.

    I’m more reticent to accept his push for industrial policy, however. While he can cite a number of successful cases where direct government support of a sector paid large developmental dividends, it seems as a practice to have as many failures as the Washington Consensus. In part he calls this a virtue: a government that has only successes probably hasn’t been doing enough, he claims. I’m less convinced.

    Among the things I liked from his discussion were the institutions that need to be in place in order for good outcomes to be more likely: “Effective industrial policy is predicated less on the ability to pick winners than on the ability to cut losses short once mistakes have been made,” addressing bureaucratic capacity as a scarce resource (which is just as scarce a resource for employing Wash. Cons. reforms too), and an acknowledgement that this is not a story of “omniscient planners …, but of an interactive process of strategic cooperation between the private and public sectors that … elicits information on business opportunities and constraints and … generates policy initiatives in response.” He puts a large premium on transparent, accountable, participatory governance, another point in his favor. Since he argues throughout that higher-level economic principles do not translate obviously one-to-one into particular institutional frameworks — multiple institutional arrangements can generate substantively similar results — he focuses on those higher level principles … and then oddly enough spends a large chunk of the chapter on cross-country large-n regressions, which are nice and supportive but perilous, particularly when he criticizes similar work by other high-caliber economists (Jeff Sachs and Daron Acemoglu and their co-authors, for instance).

    His discussion of globalization largely focuses on preserving policy space for countries that want to use industrial policy or other heterodox methods, and the difficulties (he says impossibilities) of simultaneously preserving national sovereignty, mass politics, and global economic integration. There’s a brief plug for expanded migration as part of a multilateral framework.

    The globalization section shines in discussing the international governance architecture. 1) Instead of trying to maximize trade, put the emphasis back on maximizing economic growth and poverty reduction; 2) Instead of trying to harmonize (i.e. make uniform) trade, finance, etc. policies, the global institutions should preserve nations’ policy space while reducing the transaction costs between them.

    Things I thought were missing: aid institutions, more discussion of when Washington Consensus reforms are likely to be the binding constraints, doing more to answer why import substitution industrialization largely failed (he just asserts it worked and is done). He lists 83 episodes of sustained growth spurts, and I would have liked more information about more of them, particularly in Africa.

    (This review reprinted from [...])
    Rating: 4 / 5

  3. Michael Emmett Brady on September 2nd, 2010

    The author has written an excellent series of essays that essentially develop the details of Adam Smith’s basic approach to the formation of wealth .The importance of basic institutions,such as the rule of law, an independent judiciary and police,the provision of basic infrastructure provided by a government not subject to bribery and corruption,an educated work force created by the provision of education for free for all those who can’t afford it,etc.,is crucial.Economic growth is not possible without these basic prerequisites.

    The author’s economic solutions are in line with Smith’s support for both retaliatory and revenue tariffs.Opening up an economy to foreign imports should be done in very slow gradations to make sure that the underdeveloped countries agricultural and industrial sectors are not crushed by giant multinational corporations attempting to institute trade relations based on absolute advantage, which is what has been going on for the last 30 years, at least as far as the policies of the World Bank,International Monetary Fund,Export -Import Bank amd World Trade Organization are concerned.

    One can apply the basic model to Haiti.Economic growth in Haiti is an absolute impossibility as long as the Haitian government is controlled by a totally corrupt and rapacious upper class devoted to using government institutions and power to loot the country.The same holds for the Haitian army ,poloce force,judicial system and judges.All of these institutions would have to be eliminated first before any development plan could have any probability of working.Haiti has been a failed state for the last 60 years.
    Rating: 5 / 5

  4. William Podmore on September 2nd, 2010

    Dani Rodrik, Professor of International Political Economy at Harvard University, advises developing countries not to rely on financial markets or the international financial institutions. He argues that the principles of property rights, the rule of law, sound money, and honest public finances need to be put into practice, and the conditions for doing so vary from country to country. There is no single, simple recipe for growth.

    He proposes six policies to help implement industrial policy: export subsidies, domestic-content requirements, import-export linkages, import quotas, patent and copyright infringements, and directed credit.

    He argues against relying on foreign direct investment, writing, “careful studies have found very little systematic evidence of technological and other externalities from foreign direct investment, some even finding negative spillovers. In these circumstances, subsidizing foreign investors is a silly policy, as it transfers income from poor-country taxpayers to the pockets of shareholders in rich countries, with no compensating benefit.”

    Rodrik says countries cannot have `globalisation’, nation-states and democracy all at once, only any two of the three. So if we want a nation-state and democracy, we must limit our participation in the global economy.

    If trade liberalisation brought wealth, Haiti would be the richest country in the world. As Rodrik observes, “no country has developed simply by opening itself up to foreign trade and investment.” And, “there is no convincing evidence that trade liberalisation is predictably associated with subsequent economic growth. … integration with the world economy is an outcome, and not a prerequisite, of a successful growth strategy.”

    All countries have the right to protect their own institutions and development priorities; none has the right to impose its preferences on others. So Rodrik opposes any country’s using the World Bank, the IMF and the WTO to enforce its views. He writes, “Trade rules should seek peaceful coexistence among national practices, not harmonisation.”

    Rating: 5 / 5

  5. Declan Trott on September 2nd, 2010

    One Economics, Many Recipes is a collection of nine essays by Dani Rodrik that has something to annoy almost everyone.

    The first three essays lay out Rodrik’s interpretation of the post-World War 2 growth experience, and the `growth diagnostics’ framework that he proposes in response. He argues that development is fundamentally about the introduction of new products and new methods of production. This may fail to happen because the returns to such innovation are too low, or because the cost of finance is too high. Following one path down his decision tree, the returns to innovation may be low because of poor infrastructure, lack of human capital, or unfavourable geography. Or, the returns may be high but not appropriable by the innovator, due to government or market failure. Rodrik argues that each of these potential problems will produce a different set of symptoms if it is really the binding constraint on the economy. A shortage of finance will reveal itself with high interest rates or current account deficits, a shortage of human capital with a high skill premium, and so on.

    The rest of the book suggests how reforms might be designed and implemented. Rodrik pays by far the most attention to the `market failure’ branch of the tree. His ideal industrial policy is not about `picking winners’ or comprehensive planning, but encouraging experiments with new types of economic activity. Many will fail, but even a few successes can amply repay the costs of failure.

    This is a self-confessedly modest program. Yet it contradicts everyone currently making a noise on the subject: activists because it does not demonise the IMF, World Bank, and WTO; heterodox economists because it asserts the value of neoclassical theory; neoclassical economists because it advocates industrial policy ; foreign aid advocates because it denies the importance of poverty traps; and pessimists because it offers, if not a one-size-fits-all solution, at least some concrete advice on how to engineer growth.

    It is no small achievement to disagree with so many luminaries and still receive back-cover endorsements from three Nobel laureates. He is very convincing arguing against the `laundry lists’ of comprehensive reforms that have been advocated by international institutions, whether the first generation of privatisation and liberalisation, or the more ambitious second generation focused on institution building. The case against a generalised poverty trap is equally strong: spurts of growth lasting several years are relatively common, while sustained growth over decades is rare.

    This very fact, however, points to a weakness, or gap, in the book. If lighting the fire is relatively easy compared to keeping it going, why spend so much time focusing on ignition techniques? For the long run, Rodrik’s only specific advice is to actively diversify the industrial base, and build institutions of conflict management, which he links with democracy. There is a more general recommendation to use the time bought by growth accelerations to gradually implement more ambitious institutional reforms, but this is rather vague. Is this just the standard `laundry list’ implemented more slowly? Then what becomes of the `many recipes’? Or is the long run, from a policy point of view, just a series of short runs — life is one binding constraint after another? In this case, growth diagnostics offers no way to identify and fix constraints before they start to bind, which is what he seems to be recommending. How can you avoid Argentina’s long decline, or Japan’s stagnation, or the East Asian financial meltdown, except with hindsight?

    Short-run success is, of course, not to be disparaged. It would be nice to have a reliable method of making poor countries rich, but failing that (which we have been), significantly raising the number of growth accelerations would be a great start. With this more limited goal in mind, Rodrik’s advice seems sensible, although I am sceptical of his emphasis on `cost discovery’ as a justification for industry policy. He argues that those entrepreneurs who introduced garment manufacturing to Bangladesh and soccer balls to Pakistan were revealing new information about what was profitable in those countries, which could then be copied by others. This treats manufacturing as some exotic crop that will only grow under particular conditions of soil and climate, as if it was not equally likely that Pakistan would have ended up making shirts and Bangladesh balls. Rodrik’s own summary of the evidence concludes that `managerial and labour turnover’ is the key mechanism by which innovations spread, which points to a `learning by doing’ or `human capital’ interpretation. He mentions these only briefly, which is strange, as he has argued elsewhere that the widely accepted economic case for government involvement in education is similar to the case for industry policy. I would go further and say that they are practically identical.

    This is, however, splitting hairs. Specifying the exact market failure is far less important than recognising that a particular activity (in this case, innovation) is likely to be undersupplied by profit-seeking enterprise. First-best intervention is usually impractical, if not impossible, so there is no one-to-one mapping from diagnosis to policy. It is a great strength of the book that it does not offer such precise, pre-packaged answers, even in a country-specific form but, rather, hints as to the right questions to ask as part of an open-ended policy-making process.

    Original version published in Agenda 15(1), 2008
    Rating: 4 / 5

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