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.