Economic Growth’s Many Recipes
Dani Rodrik
CAMBRIDGE, MA.—Development “big think” has always been dominated by
comprehensive visions about transforming poor societies. From the so-called
“Big Push” to “Balanced Growth,” from the “Washington Consensus” to “Second
Generation Reforms,” the emphasis has been on wholesale change.
Today’s fashion in development is no different. The prevailing obsession with
the “governance” agenda entails a broad-based effort to remold institutions in
developing societies as a prerequisite for economic growth. The United Nations
Millennium Project involves a large-scale, coordinated big push of investment
in human capital, public infrastructure, and agricultural technologies.
But there have also been iconoclastic dissenters from such comprehensive
approaches, among whom Albert Hirschman was without doubt the most
distinguished. Indeed, Hirschman’s seminal contributions have now been
recognized by the United States Social Science Research Council, which this
year established a prize in his honor.
Hirschman’s interests shifted away from economic development over the course of
his illustrious career. But when he was still involved in development debates,
he would frequently remind his contemporaries that any country that had the
capacity to undertake comprehensive programs would not be underdeveloped to
begin with.
Indeed, he once chided John Kenneth Galbraith for enunciating a long list of
prerequisites for foreign aid to be effective. If developing countries could
meet these conditions, he wrote, they would be in a position to send foreign
aid to the United States!
Hirschman believed that the possibilities for economic development are not
nearly as constrained as comprehensive theories would lead us to believe. The
imbalances specific to underdevelopment create opportunities that policymakers
can seize on. Instead of relying on fads emanating from abroad, we need to
experiment and look for the unique solutions that will allow us to circumvent
ingrained social structures that inhibit growth.
Hirschman’s central insights on development have held up extremely well. The
key lesson of the last half-century is that policymakers must be strategic,
rather than comprehensive. They have to do the best with what they have instead
of wishing they could transform their society wholesale. They need to identify
priorities and opportunities, and work on them. They must seek sequential,
cumulative change rather than a single, all-inclusive breakthrough.
Successful countries do share some common features. They all provide some
degree of effective property rights protection and contract enforcement,
maintain macroeconomic stability, seek to integrate into the world economy, and
ensure an appropriate environment for productive diversification and
innovation.
But how these ends are achieved differs. For example, greater integration with
world markets can be achieved via export subsidies (South Korea),
export-processing zones (Malaysia), investment incentives for multinational
enterprises (Singapore), special economic zones (China), regional free trade
agreements (Mexico), or import liberalization (Chile).
The best-designed policies are always contingent on local conditions, making
use of pre-existing advantages and seeking to overcome domestic constraints.
That is why successful reforms often do not travel well. Reforms, after all,
are not hothouse plants that can be transplanted at will in any soil.
Moreover, generating economic growth requires hitting the right targets, not
doing everything at once. What matters at any point in time is to alleviate a
society’s immediate binding constraints – another reason why different policies
are needed for different places. China was constrained by poor supply
incentives in agriculture in the late 1970’s. Today’s Brazil is constrained by
inadequate supply of credit. El Salvador is constrained by inadequate
production incentives in tradable goods. Zimbabwe is constrained by poor
governance.
These problems all require different methods for unlocking growth. What we need
is selective, well-targeted reforms, not a laundry list.
Countries run into trouble when they do not use high-growth periods to
strengthen their institutional underpinnings. Two kinds of institutions in
particular need shoring up: conflict management institutions to enhance
economies’ resilience to external shocks, and institutions that promote
productive diversification. Growth collapsed in Africa in the late 1970’s
because of the weakness of the former, and fizzled in Latin America after the
first half of the 1990’s because of the weakness of the latter.
This line of thinking has vast implications for the design of appropriate
global economic arrangements. Hirschman would be aghast at the extent of
intrusion into domestic policymaking that the World Trade Organization or the
International Monetary Fund engage in nowadays. As international bureaucracies
with a penchant for “best practices” and common standards, these institutions
are woefully unsuited to the task of seeking innovative, unique pathways suited
to each country’s particular circumstances.
But Hirschman also would no doubt chide developing country governments for not
living up to their responsibilities and for passing on the buck so freely to
these external agencies. For, ultimately, it is up to each country to say,
“Thanks, but no, thanks; we’ll do it our way.”
Many economists were skeptical about Hirschman’s approach because they could
not quite fit it into the economics they had been trained to practice. But,
over the years, economics has become richer, too. Dynamic models have become
much more common, an economics of the “second-best” has flourished, political
economy has become mainstream, and behavioral economics has thrown the
“rational actor” into doubt. As a result, Hirschman looks less and less the
maverick that he fancied himself to be. Conventional wisdom may finally be
catching up with him.
** Dani Rodrik, Professor of Political Economy at Harvard University’s John F.
Kennedy School of Government, is the first recipient of the Social Science
Research Council’s Albert O. Hirschman Prize. His latest book is One Economics,
Many Recipes: Globalization, Institutions, and Economic Growth.
Copyright: Project Syndicate, 2007.
http://www.project-syndicate.org/commentary/rodrik16
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