One Economics, Many Recipes: Globalization, Institutions, and Economic Growth [Paperback]

This is a terrific book. It begins with a good and troubling question: If economists are so smart, why have the most prominent success stories in economic development in recent decades been in countries (China, India, South Korea, Taiwan, Singapore) that ignored our advice? Rodrik's answer is that the advice - mainly Washington Consensus and then its follow-ons - was not so much wrong as a) premature and b) insufficiently flexible. His analysis of recent experience suggests that there are many ways to get growth started in a stagnant economy, and that it takes a very specific, informed, and open-minded local analysis - what he terms "growth diagnostics" - to determine what exactly are the binding constraints in each setting. Furthermore, policies that address those constraints must be politically viable, and that may mean tailoring them so that they create better incentives at the margin without destroying or transferring existing rents.

Once economic growth has started, THEN some of the more standard policy prescriptions, introduced carefully and gradually, may be appropriate and even necessary in order to make growth sustainable. Thus, for example, Rodrik argues that both China and India are moving now in more orthodox policy directions, and appropriately so, but that both relied on quite unorthodox measures to make their initial way out of stagnation.

There are many other issues addressed, including the importance of political arrangements that allow local needs and preferences to be expressed and the case for international trade policies that allow for diversity in national institutional arrangements. The book closes with a detailed and (to me) quite persuasive critique of the focus of the WTO on increasing trade for the sake of trade rather than considering more carefully which changes in trade policy actually make a difference in the lives of the world's poor. His analysis of the Doha Round suggests that, contrary to the received wisdom, a general worldwide liberalization of agricultural markets and removal of developed country subsidies would lead to only small reductions in poverty, and in fact would likely harm many poor consumers in many countries.

I recommend this book highly to anyone interested in globalization and development. It is extremely well written, though some sections may be slow going for non-economists. The overall analysis should be quite readable and thought-provoking for the general reader wishing to get a fresh perspective on these important issues.

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

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."