The bigger, the better

<strong>One Economics, Many Recipes: Globalisation, Institutions and Economic Growth</strong>

Dan

Economists endure a certain professional malaise. The poor record of the dismal science is well documented in popular wisdom, from George Bernard Shaw's cry that all the economists in the world couldn't reach a conclusion, to Harry Truman's wish for a one-handed economist. And in no field of economics is the lack of conclusive advice more noticeable, and regrettable, than in the area of development.

To make this point, Dani Rodrik, professor of international political economy at Harvard University and a leading figure in the debate, invites us early in his book to engage in a thought experiment. Imagine that a Martian visits our planet and tries to square the development record of the past few decades with policy advice given by the international financial institutions and western economists. He would see that many countries which had followed the advice (Latin America) had failed to develop, while others ignored it yet are catching up rapidly (Asia). The visitor would conclude that the advice was wrong. In this collection of essays, covering the recent history of economic growth and challenges of globalisation, Rodrik is almost as scathing as the Martian. But, tellingly, he counters the intuitions of the "globalisers" and the anti-globalisation lobby alike.

The lack of simple answers is reflected in the discussion of economic growth. Rodrik has no doubt that growth is the best tool for reducing poverty: although average incomes have fallen recently in many developing countries, most of these countries' citizens (who in fact live in China and India) are now better off. In the case of China, 400 million people have been taken out of poverty since 1980. Was this achieved by applying standard teachings from economics? Yes and no. Rodrik argues that the theories learned by most economists have been translated over the years into policy prescriptions that are too simplistic.

The recipe to which he refers is often described as the Washington consensus. Its tenets are the usual free-market economic guidelines of trade liberalisation, deregulation, privatisation, tax reform, restraint with public spending and liberalisation of interest rates. Rodrik recognises some valuable high-order economic principles in here: the need for property rights, market-oriented incentives, fiscal solvency and sound money. But these principles can map across to an almost unlimited range of policy prescriptions. That is why the Martian, and most empirical studies, fail to find a link between specific policy recommendations of the Washington consensus and economic growth.

Another reason why the standard theory is so flexible is that "igniting" economic growth is much easier than sustaining growth over time. A range of unorthodox policies has been used to get growth going: Taiwan's export subsidies, Singapore's tax incentives to attract foreign investment, Botswana's high public spending and Chile's state ownership of its copper-exporting industry, to name a few. In Rodrik's mind, the key is not to rely on a proverbial policy silver bullet, but to take local conditions into account in applying a few malleable economic principles.

Sustaining economic growth over time, as Rodrik explains in the second section of the book, requires "sound institutional reform" - the buzz-phrase of the moment in the world of development economics. The expression is used to refer to a set of bodies guaranteeing financial super vision, corporate governance, labour standards, business-government relations, low corruption, social safety nets and monetary and fiscal management. Rodrik admits that while the basic diagnosis is right, the lack of flexibility in applying it, and failure to take into account local norms, have derogated the principle of good institution-building. The international financial institutions are unable to "overcome their bias towards a particular, 'neoliberal' social-economic model - a model that is approximated . . . in the real world by the United States". He cites the example of South Korea, which, brought under IMF conditionality after the crisis of 1997, had its economy and institutions remoulded in the image of a Washington economist's free-market dream.

There is plenty of such detail on the desirability of different institutional arrangements. In one chapter, he considers the role of geography and colonial history in institutional reform. He also looks at the link between democracy and economic outcomes. Finally, Rodrik uses case studies to show how industrial policy (widely considered to be a dirty phrase in policy circles) can be a powerful instrument for development.

Finally, in what is probably the most readable section, Rodrik tackles globalisation. He identifies a three-way tension at the heart of the debate, as "the needs of efficiency, equity and legitimacy cannot all be met". In other words, it is not possible simultaneously to retain nation states, advance international economic integration and deepen the democratic process. To argue that global markets are being inadequately governed by national bodies is not a new proposition, but Rodrik's approach to the problem is novel. In the short term, his preferred solution is to agree an international system that maintains some of the core benefits of globalisation, but tames its suffocating effect on national policy by designing a system of opt-out clauses. He illustrates with a discussion of how such a system would apply at the World Trade Organisation. In the long run, the most likely outcome is the demise of the nation state and the birth of a "global federalism" that will create the supranational institutions needed to manage the globalisation process.

Rodrik's book hits many of the right buttons. He has put together a collection of essays of sufficient breadth to engage both the technical observer and the casual reader. His treatment of the subject will come as a bitter pill to both the anti-globalisation movement and the developmentariat, that international coterie of practitioners and commentators working on development issues.

One Economics, Many Recipes will seem inconclusive to some. But Rodrik does provide an overarching answer: there are many answers.

This article first appeared in the 07 January 2008 issue of the New Statesman, Pakistan plot