If so many recipes can work, why do so many fail ?

by John Quiggin on November 12, 2007

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.

The ‘Washington consensus’ was notable for the extent to which it conflicted with earlier policy prescriptions for developed countries that encouraged state-led development. Even more striking is the extent to which it turned on recent, and in some respects short-lived, changes in thinking about economic policy in developed countries, most obviously the neoliberal surge associated with the Thatcher government in the UK. In this respect, at least the approach adopted in the 1990s was consistent with that of the past. Consistently, the dominant ‘recipe’ for economic development has involved rigid adherence to the policy approaches fashionable in developed countries at the time, or perhaps a few years previously.

The variety of policies that have been adopted at different times in developed countries provides another way of looking at Rodrik’s argument. Looking at the experience of the developed world, it is immediately obvious that a wide variety of economic institutions are compatible with high and rapidly growing levels of income.

This is most obvious in relation to the longest-running policy dispute of all; that between free traders and protectionists. Britain’s 19th century economic pre-eminence was achieved under the banner of free trade, but it was challenged and ultimately overtaken by Germany and the US, both of which relied on protection.

In most European countries,the long boom from 1945 to the 1970s was ushered in by a wave of nationalisations, and was accompanied by a steady growth in the role of government. But the reversal of these nationalisatisations in the 1970s and 1980s was followed by a recovery from the economic dislocation of those decades. Particularly in the UK, many claimed a cause-and-effect relationship.

The US system of employment-based health care provides another example. The historically contingent outcome of policy processes in the 1930s, it differs radically (and in the views of most commentators, for the worse) from those in other developed countries. Yet it has delivered adequate health care to the majority of Americans, and the allocation of up to 15 per cent of GDP to this sector has not obviously harmed economic performance.

In summary, the experience of the developed countries supports Rodrik’s central thesis. A wide variety of policy views have prevailed in different developed countries at different times, and all have proved compatible with high incomes and sustained economic growth over long periods. Disputes over the relative merits of alternative policy frameworks have mostly remained unresolved, since the statistical evidence is insufficient to settle them. Mainstream economics yields many policy recipes and no easy way of deciding between them.

But if so many recipes work, why are there so many failures? Given the availability of technology and capital from developed countries, standard growth theory predicts convergence of income levels between countries, but, as Rodrik shows, this has not happened. Instead, the number of countries falling behind the developed world in relative terms is about equal to those catching up.

A partial explanation is that some countries are caught in a low-level trap in which basic preconditions for growth like civil order and a functioning education system are missing. Under such conditions, the choice of economic policy may not really matter.

Second, some recipes really are bad, so bad that they have never been tried in the developed countries. Complete autarky, as implemented in North Korea, is an obvious example. Some of the experiments undertaken under the influence of the Washington Consensus, in Argentina for example, also appear to fall into this class.

These are partial explanations, but do not seem adequate to explain the variety of outcomes that has been observed. Rodrik’s central argument is that different initial conditions require different policy approaches.

Again, the experience of the developed countries tends to support this view. Attempts to transplant policies from one country and institutional setting to another have had, at best, mixed success. There’s plenty of room for debate about how tight these cultural/historical constraints are, but it’s impossible to ignore them.

More specifically, Rodrik distinguishes between situations where the cost of capital is too high, situations where the appropriability of returns to economic activity are too low and situations where returns to economic activity are low because of inadequate human capital or similar factors. He suggests methods for identifying the binding constraint, and focusing on policies designed to relax that constraint, rather than the across-the-board liberalisation favoured by simplistic versions of the Washington consensus. This seems like a sensible approach, though there are no doubt plenty of difficulties in implementation.

Having looked at the extent to which policy fashions in developed countries affect the development debate, it’s worth observing that the process sometimes goes in reverse. That is, the success of some developing countries in achieving high growth is used to argue that some part of their policy should be replicated in developed countries. All sorts of policies have been supported in this way, but the dominant fashion of the 1990s was to use the (presumed in advance) success of the Washington consensus to argue for the inevitability and desirability of free-market reform in developed countries.

This kind of thing has not entirely gone away, despite the failure of the Washington consensus in the countries that embraced it most fully. As Rodrik notes, we see the same kind of talk about China, even though rapid growth has coexisted with large-scale state ownership, financial suppression and restrictions of all kinds. However, such talk will convince only those who want to be convinced.

{ 14 comments }

1

mollymooly 11.12.07 at 10:29 pm

But the reversal of these privatisations in the 1970s and 1980s…
You mean the reversal of these nationalisations?

2

John Quiggin 11.12.07 at 11:13 pm

Fixed now, thanks

3

Tim Worstall 11.13.07 at 11:22 am

The perils of living in rural Portugal: I’m late with my copy of this. But there’s one argument that’s leaping out at me from just the first chapter:

“In particular, first-order economic principles,- protection of property rights, contract enforcement, market-based competition, appropriate incentives, sound money, debt sustainability- do not map into unique policy prescriptions.”

“The Martian would recognize that the growth record is consistent with some of the “higher-order” economic principles that inspire the standard policy consensus. A semblance of property rights, sound money, fiscal solvency, market-oriented incentives- these are elements common to all successful gropwth strategies. Where they have been lacking, economic performance has been lackluster at best.”

“First, China relied on highly unusual, nonstandard institutions. Second, these unorthodox institutions worked precisely because they produced orthodox results, namely market- orientated incentives, property rights, macroeconomic stability , and so on.”

“In fact, principles such as appropriate incentives, property rights, sound money and fiscal solvency all come institution-free.”

“No country has experienced rapid growth without minimal adherence to what I have termed higher-order principles of sound economic governance-property rights, market-oriented incentives, sound money, fiscal solvency. But as I have already argued, these principles have often been implemented via policy arrangements that are quite unconventional.”

That argument being that for the goal, development, to be reached it is a necessary condition that we have those standard (neo-?) liberal things, markets, sound money, property rights etc, but that there are many ways of reaching them. Obviously I’ll find out more when I read the rest of the book, but doesn’t this mean that we can already reject any development theories or policies which do not entail progress towards those (neo?) liberal things?

4

Alex 11.13.07 at 12:26 pm

Perhaps, but the Worstall Dog Whistle Analyser (£10,000 from TYR Labs) next to me is flashing a red; the point here is how you define “policies which do not entail progress towards these things”, and anything which does not increase the rate of trachoma among the poor is going to be demonised by Timmeh by placing it outside this set.

Consider this a pre-emptive strawman burning.

5

dsquared 11.13.07 at 12:43 pm

it is a necessary condition that we have those standard (neo-?) liberal things, markets, sound money, property rights etc

there ought to be a clue from the fact that China is a success story that “minimal adherence” is doing a lot of work here. “Property rights” doesn’t even necessarily mean “individual property rights”.

6

nu 11.13.07 at 5:01 pm

Is it appropriate to describe property rights, market-oriented incentives, sound money, fiscal solvency as neo-liberal things ?

doesn’t this mean that we can already reject any development theories or policies which do not entail progress towards those (neo?) liberal things?

Well, these principles have often been implemented via policy arrangements that are quite unconventional.
I guess that’s a complicated issue.
Land reforms, for instance are often viewed as attacks on propriety rights but it has been a way to establish markets and propriety rights in the past. However that would not mean that land reforms automatically have those results.

7

John Quiggin 11.13.07 at 9:16 pm

I think we have to give the neoliberals a point on fiscal solvency and sound money. Although I don’t think anyone has ever been opposed to these things, and they have been delivered under a wide range of institutional arrangements, people got rather blase about budget deficits and inflation towards the end of the long boom. In retrospect, this was not a good idea.

But that’s a point that’s of mainly historical interest. The big issue is property rights, and here DD is right on the money. What matters is secure property rights under the rule of law, not unfettered private property rights.

8

nu 11.13.07 at 10:01 pm

With the real cases of Argentina, Zimbabwe, Venezuela and debates in Mexico, Brazil, parts of Africa and the EU, how are fiscal solvency and sound money points of mainly historical interest ?

When do propriety rights stop being secure and become unferrered ?

9

abb1 11.13.07 at 10:42 pm

In my uneducated opinion there are no ‘recipes’, no experimentation. In every single country every single policy represents a compromise of all various interests involved. It’s strictly deterministic.

10

dsquared 11.14.07 at 9:28 am

I think we have to give the neoliberals a point on fiscal solvency and sound money

Sound money yes, (as long as it means the absence of hyperinflation rather than “inflation nutterism”). But fiscal solvency seems very controversial indeed to me. I’d only sign up for a non-explosive path for the primary deficit as being a sensible minimum condition. “Fiscal solvency” implies to me that governments shouldn’t default on their debt, and in lots of cases I think they should.

11

William Newman 11.16.07 at 11:02 pm

Is it reasonable to equate protectionism at the level of the United States in the 19th century with protection in the Third World? I have travelled very little outside developed countries. But various times — perhaps half a dozen times in person, another half a dozen times in print — people have stories about how some cheap, very portable consumer good was a big hit. A Polaroid-style photo (of the local) was at the high end for cost and unportability, and writing implements were at the low end. Especially at the low end, it’s pretty hard for me to believe that the locals didn’t have enough to trade: even at $200/year a ballpoint pen is not unthinkably expensive. I don’t know what the mechanism was — just graft and banditry, perhaps — but I don’t see how useful knickknacks at that level could ever be a surprise unless the effective barriers to trade were off the scale, far higher than anything Smoot and Hawley dreamed of. People have told me to read the journals of Lewis and Clark (for other reasons) and when/if I get around to it I will be wondering whether they tell of useful knickknacks which somehow absolutely failed to make it into the interior.

12

mugwump 11.17.07 at 8:17 pm

Second, some recipes really are bad, so bad that they have never been tried in the developed countries. Complete autarky, as implemented in North Korea, is an obvious example.

Oh, autarky is North Korea’s problem. Nothing to do with communism or stalinist dictatorship.

13

nu 11.17.07 at 8:51 pm

Oh, autarky is North Korea’s problem. Nothing to do with communism or stalinist dictatorship.

on top of being a stalinist dictatorship, it’s in complete autarky.
that’s probably why North Korea is worse than damn near everywhere on earth, including other communist/stalinist dictatorships.

14

abb1 11.17.07 at 10:57 pm

Just like it’s often impossible to comprehend IMF and World Bank actions without deep understanding of the Washington Consensus, comrades, to appreciate North Korean achievements you obviously need to spend time studying the Juche idea – the new philosophical thought which centres on man.

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