“One Economics, Many Recipes” makes a lot of useful and constructive suggestions about how to attack the central problems of economic development. However I don’t think it gives enough emphasis (fundamentally because I don’t think it’s possible to give enough emphasis) to international debt as a constraint on development. Nearly all of the success stories in the book relate to countries which started their periods of development without a large debt burden, and the presence or absence of large net external debt is certainly one characteristic which matches up well to the motivating stylised fact in the book – the distinction between those countries like Argentina which followed all the standard policy recommendations but didn’t develop and those like China which ignored them and did. In this essay, I’ll try and flesh out a few provocative views on the financial aspects of development policy, which in my view are just as important real-world constraints as the institutional real-economy factors that are the main subject matter of the book.

Actually, just as I don’t think it’s sensible to carry out international comparisons of crime rates without taking demographics and urbanisation into account, I don’t think that any kind of comparative analysis of developing economies can be carried out at all without conditioning on the debt burden. It’s that important. When you have a situation in which a country’s capital account is dominated by contractual flows payable in foreign exchange, that is far and away the most important fact about that country’s economy. This is because as long as the debt service constraint is binding (and I discuss what happens when it isn’t, below), then unless the country is receiving massive net transfers from abroad, the entire economic development program is going to end up being twisted toward a capital account constraint which almost certainly has nothing to do with a sensible locally-based development plan of the kind that Dani advocates.

And when you do base your analysis on debt as the “first fact”, all sorts of other problems start appearing in a new light. In Manzano & Rigobon’s analysis, for example (carried out using cross-sectional regressions, so appropriate caveats apply as I still don’t really like cross-sectional regressions when they agree with me), “Natural Resources Curse” disappears when you condition on the amount of debt outstanding. I’ve also argued elsewhere that there’s good reason to believe that a lot of the governance problems in developing countries have their roots in the debt burden – when a balance of payments crisis at least once every ten years is more or less written into the numbers, it is much more difficult to develop a stable government, and the incentive is much greater for incumbent rulers to get while the getting’s good.

And, sticking to the analysis of “One Economics, Many Recipes”, debt makes everything more difficult. Seen as a piece of economic cybernetics, Dani’s point is that the conditions for development are those that you would expect to hold for a planning system – a predictable basis upon which to make plans (law and order), predictable feedback from plan to planner (a price mechanism), and compatibility of goals for the planner (appropriability of profits) . It isn’t difficult to see how a debt burden interferes with this. A debt burden immediately creates a wedge between returns on investment and appropriable returns to the decision makers. It distorts price signals, not least by creating a special demand for foreign exchange which needs to be satisfied by the production of export commodities.

And finally, it’s in the nature of debt gearing that it increases the riskiness of any financial system. Not only does this undermine the basis for planning, it also interferes with a fourth precondition for development – the reinvestment of the proceeds of successful investments into new projects. In general, Latin America’s growth underperformance of the last hundred years hasn’t been due to a slow rate of growth during normal conditions – it’s been the result of periodic crisis which have meant that Latin American economies haven’t enjoyed the benefit of compounding.

So debt is bad stuff. I’d also argue that debt makes a good “first fact” because, and this is the controversial bit, it’s one of the aspects of a developing economy which it is more sensible to regard as exogenous than many others. In general, whatever choices are available to the new government of a third world country, the choice of an outstanding stock of foreign debt isn’t one of them. As you install yourself in the Presidential palace, the outstanding debt figure is waiting for you on your desk, as is the general assumption that it’s your job to pay it. Thanks to the miracle of compound interest, it isn’t even usually true to say that most developing countries even have all that much control of their debt path over time. For the sake of being provocative, I would even say that overseas debt plays an important part in the kernel of truth at the centre of the vast nut of nuttiness which is the “bastard-Chomskyite”[1] theory of development – the surprisingly widespread belief that underdevelopment in the third world occurs as the result of an intentional policy on the part of OECD countries, and that rich countries’ economic growth occurs at the expense of poor countries.

What do I mean? Well, as I type, it does not currently say on Amazon that “People Who Bought ‘One Economics, Many Recipes’ Also Bought ‘Confessions Of An Economic Hit Man’ “, but maybe it should. John Perkins’ book was flawed – I can sort of see the commercial idea behind the decision to intersperse an interesting account of Big Development in the 1970s with a psychosexual memoir, but I think it was terribly unwise – but in all the chucklemouthed dismissals of it as “conspiracy nonsense” that came out in the reviews, I didn’t see one single person who was prepared to deny that the firm Chas T Main did exist, that it did offer consulting services to developing world governments bidding for large debt-financed projects and that Perkins did work for it in the role he said he had, and therefore was at least as well-placed to comment on the ethical standards it observed as, say, Michael Lewis was to tell us about the bond department of Salomon Brothers in “Liar’s Poker“.

And his central case (stripped of a lot of unsupported and probably intrinsically unsupportable assertions about intelligence agencies) is that a substantial proportion, perhaps even the greater part of the debt of many poor countries to multilateral organisations is the result of high-pressure salesmanship, often with bribery being an integral part of the process, and often with high-level political support from rich country governments promoting domestic business interests. This is a fact – it’s actually so well-substantiated a fact that it was quite an achievement on Perkins’ part to make it look like a wild self-aggrandising piece of conspiracy theory.

Furthermore, a lot of those domestic business interests were in the resources sector, so it can certainly be argued that this is a big cause of the ganglion of problems described as “natural resources curse”. And this explanation of “natural resources curse” can even make a testable prediction – it would predict that Honduras, Guatemala and the Dominican Republic, none of which has significant natural resources, but all of which have been the subject of the same kind of treatment as the resource states from developed world business interests, would each of them have a big debt burden and a set of governance and development problems pretty similar to natural resource curse. And guess what, the prediction works; the banana republics are about as bad as you’d expect them to be[2].

To put it plainly, a lot of the problem of development which needs to be solved has to do with a specific problem called debt which has been inflicted on the developing world from outside by people who wanted to expropriate a lot of wealth from them – it isn’t an intrinsic problem of those economies, any more than a bond trader whose Porsche just got keyed has been made a victim of “nice car curse”. But the good thing about this problem is that it has a really easy solution.

I honestly think that Mohammed Yunus’s Nobel Peace Prize ought to have been given to Nestor Kirchner of Argentina, for doing something much more radical which will potentially have a lot more impact on the development of the poor world. Before the Second World War it was not unknown for debt obligations of poor countries to be enforced by gunboat. After the war, this was unfeasible, and so the obligation was enforced with the threat that any defaulters would be starved of overseas capital forever. This was never a credible threat in the game theory sense, and Kirchner was the guy who definitively called the markets’ bluff. He defaulted on Argentina’s debt, and nothing very bad happened – I don’t think anyone will seriously argue that Argentina’s future access to capital markets is going to be any different from that of, say, Thailand, which has never defaulted.

Which means that my second bite of the cherry in this seminar is rather tangential to the book. I do think that it’s more or less impossible to get a full understanding of development issues without recognising the central importance of debt, but on the other hand, it’s a problem with a single solution and an easy one – if you don’t like it, don’t pay it.

[1] “Bastard Chomskyite” in an analogous sense to Joan Robinson’s use of “Bastard Keynesian” to refer to people who used a misunderstanding of Keynesian economics to advocate for inflationary fiscal policy in the 1970s.

[2] In other words, “natural resource curse” is just a special case of the tendency of developing countries in the twentieth century to attract predatory overseas capitalists like dogs attract fleas. The Seven Sisters were the masters of playing the political-industrial game, but there were others; lots of otherwise inexplicable collapsing development paths can be explained just by noticing that the economy in question caught a nasty case of ITT, Dole Fruit or the Vestey family.

Update 2: David Warsh supplements the post below with a very interesting analysis of what Rodrik’s arguments mean in the broader debates over economics and development.

Update 3: Kieran has done some LaTeX-fu on the PDF, providing a much nicer looking and more functional product – hence I’ve replaced the original file with his updated version.

Dani Rodrik’s new book, One Economics, Many Recipes: Globalization, Institutions and Economic Growth ( Powells, Amazon ) is a major contribution to debates on globalization, economic development and free trade. It brings together much of his existing work bringing together an important critique of the Washington Consensus with positive suggestions about how best to encourage economic growth, and how to build a global system of rules that can accommodate diverse national choices. We’re pleased and happy that both Dani and several other guests have agreed to participate in a new Crooked Timber seminar. This seminar will be published in two parts – the first today (featuring Henry Farrell, John Quiggin, Mark Thoma and David Warsh), the second tomorrow (featuring Daniel Davies, Dan Drezner, Jack Knight, Adam Przeworski, and Dani’s reply post). As with previous Crooked Timber seminars, it is published under a Creative Commons license (see below). Tomorrow, I will post a PDF of the entire seminar (plus a LaTeX file for anyone who wants to play around with it). If you have specific comments about the contributions, please post them in the relevant comments section for the specific post. For general technical glitches etc, post comments here.

The (non-CT regular) participants in the seminar are, in alphabetical order:

(1) Dan Drezner blogs at http://www.danieldrezner.com/blog/. He is an Associate Professor at the Fletcher School of Law and Diplomacy, at Tufts University. He has written two academic books on international political economy (looking at sanctions and globalization), as well as a Council of Foreign Relations report and numerous articles. He possesses specific expertise on the intersection between celebrity culture and global politics.

(2) Jack Knight is Sidney W. Souers Professor of Government at Washington University in St. Louis. He is author of a widely cited book on institutional theory, Institutions and Social Conflict as well as numerous articles. He has a new book co-authored with Jim Johnson on rational choice, pragmatism and deliberative democracy, which will be published next year.

(3) Adam Przeworski is Carroll and Milton Petrie Professor of European Studies and Professor of Politics at New York University. He is the author of several monographs and numerous articles on topics including social democracy, democratic transitions and economic development. This interview (previously discussed in this CT post) gives a good overview of his life, politics, and academic work.

(4) Dani Rodrik blogs at Dani Rodrik’s Weblog. He is Professor of International Political Economy at the Kennedy School of Government of Harvard University, where he teaches on international development issues. He has written two books, copious numbers of academic articles and policy papers, and was recently awarded the inaugural Albert O. Hirschman Prize of the Social Science Research Council.

(5) Mark Thoma blogs at Economist’s View, which has quickly become established as one of the key forums for debate of economics and politics on the Internet (with occasional interjections by Paul Krugman and others). He is professor of economics at University of Oregon, where he has published numerous articles on aspects of macroeconomics theory.

(6) David Warsh is the editor of Economic Principals. He previously covered economics issues for The Boston Globe and Forbes Magazine for 25 years, and is the author of a widely acclaimed (and rightly so) intellectual history of the new growth theory in economics, Knowledge and the Wealth of Nations

This work is licensed under a
Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License.

To put it in a nutshell, is it “One Economics, Many Recipes” or “Many Economics, …”? In what sense do we have “one economics”? Economics is a science that derives conclusions about states of collectivities (“the economy” but also “the polity,” since the same methods are now applied to politics) from assumptions about preferences of individuals and the constraints they face. What unifies economics are the methods for making such inferences. The assumptions vary: they are at best disciplined by “stylized facts” and often at variance with more direct, psychological, evidence. Moreover, these assumptions often reflect ideological priors. One example that jumps to my mind is an article, published in a leading journal of political economy, that went like this: assume that tax revenues do not finance inputs into production, assume that they do not subsidize consumption, write a growth model, and—surprise—taxes are bad for growth! But almost the same year, another article, published in an equally reputable journal, assumed that public inputs are complementary to private ones and that tax revenues are used to finance public productive services, only to find that growth is maximized at a positive, indeed sizeable, tax rate.

One may think that even if the assumptions are to some extent arbitrary, they are at least disciplined by empirical tests of the conclusions. Assumptions are “as if,” but conclusions must defend themselves against facts. But econometrics are a tolerant disciplinarian. As a frequent practitioner I am not cynical: some results withstand all specifications and all estimators, some results will not appear however one massages the data. But many are simply not robust. Econometric models are also based on assumptions and, indeed, these assumptions are so demanding that at least some of them are, perhaps always, violated. In the presence of endogeneity, errors of measurement, and omitted variables, all estimators are biased. And since different estimators correct for different biases, they often generate disparate results. Moreover, I suspect again that ideology has a way of sneaking even into econometrics. When in 1993 Limongi and I reviewed studies of the effect of political regimes on economic growth, we found that the results perfectly fitted the ideological climate of the period when they were published: before 1982 none found that democracies promoted growth, after 1982 none found that dictatorships did.

All this leads me to think that economics is one only with regard to the criteria of inference and evidence that are required to publish in the journals of the discipline. But with different assumptions and divergent statistical results, the resulting body of knowledge would not be unequivocal even if it were generally applicable to all possible contexts. The neo-liberal tenet that dismantling the state is sufficient for “the market” to usher a country on the road to development had little justification in the body of economic knowledge: after all, the theory says that economies stagnate if markets are perfectly, as distinctly from monopolistically, competitive. Yet this was the advice offered around the world by eminent economists.

Rodrik does not get entangled in these issues of philosophy of science because his point of departure is appropriately practical. His emphasis is that even if economics were one, the concrete situation of particular countries always includes factors that are not considered in general theories or that coexist in interactive combinations not entertained by such theories. And ignoring them may cause havoc. What we need, according to Rodrik, are theoretically and statistically informed analyses of particular situations. Such analyses must be consistent with what we believe theoretically and what we think to be true empirically, but they also must pay attention to facts specific to each context. And since different countries face different problems, these call for different remedies: his axiom is that “appropriate growth policies are almost always context
specific” (page 4).

This is a salutary approach, appropriately cautious about general theories, appropriately wary about treating them as ready-made recipes, and importantly calling for considering the particular facts at hand. As I was reading the book, I remembered a public debate in 1990 about economic reforms in Poland with a prominent economist who had been an advisor to a Latin American country. At one time during the discussion I asked him what proportion of the Polish labor force was employed in agriculture. After some squirming, he gave the number of the country from which he had just returned, which was 40 percent of the true Polish number. No wonder Poland experienced unemployment rates nearing 20 percent during the following fifteen years. Hence, I am taken by Rodrik’s approach to policy design: it is practical, responsible, and modest. Moreover, I found some of his analyses, particularly of industrial policy, exceptionally illuminating.

Yet studying specific situations is a craft, not a science. I am convinced by the spirit of “growth diagnostics” that seeks to identify the constraints to development that are most binding in a particular economic and political context. I also see the theoretical justification of the Hausmann-Rodrik-Velasco method for identifying such most binding constraints. Yet I am not sure that this approach leads to unique conclusions. Indeed, all the applications of the method I have seen rely on intuitive understandings. I can easily imagine someone applying the same method to El Salvador, Brazil and the Dominican Republic and arriving at conclusions different from those of Rodrik. By construction, when we treat situations as unique, at one point we have to stop relying on general knowledge, and then what else can guide us than intuition and perhaps caution?

The chapter on institutions diverges in tone from the pragmatism that permeates the rest of the book. We now get a general recipe: “participatory politics.” Rodrik offers several regression analyses intended to support this recipe, but within the confines of this book he obviously cannot consider the endogeneity of institutions and other econometric issues. The impact of institutions on development is the new rage and even a narrower topic of the impact of democracy on growth has recently been subject to meta-analysis based on over 400 statistical studies. And is the observation that “Mauritius found its own way to economic development because it created social and political institutions that encouraged participation, negotiation, and compromise” (page 168) based on growth diagnostics?

In spite of my reaction against this chapter, it is still an advance over the view in which the political and economic future of a country was sealed by the first mosquito that bit a European settler when he stepped on its shore. I wish, however, that Rodrik had clarified the relation between two points he makes, namely, that a successful market economy can be sustained by a variety of institutional arrangements and that “institutions matter,” even more narrowly, that “participatory institutions” are the engine of growth. If “there is no single mapping between the market and the set of nonmarket institutions required to sustain it” (page 162), then identifying the institutions that are compatible with sustained growth calls for a different methodology than Rodrik, and everyone else, uses. Yet the first point—that development can be sustained under different institutional frameworks as long as they manage conflicts, coordinate, and regulate—is tantalizing and calls for systematic attention. I am less taken by secure property rights, because property rights can be excessively as well as insufficiently protected, but this is a digression.

Altogether, this is a book that convinces by its intelligence and evokes trust by its modesty and its sense of responsibility. In spite of my specific doubts and disagreements, I believe that Rodrik has opened a new vista for policy analysis. After reading it, one can no longer believe in mantras, whether they are agreed upon in Washington or elsewhere. We have to pay attention to real problems that people face in particular contexts and seek to relieve their particular deprivations in ways that are suited to these contexts.

The first part of the book argues that the institutions that foster economic growth are highly sensitive to local conditions. Because local conditions vary so widely, it is logical that the policies that promote growth should also vary widely from country to country, while still adhering to a few key macro-conditions. In other words, there is such a thing as policy substitutability. While neoclassical economists are by and large correct about the necessary conditions for growth, the policy means through which those conditions can be met are much more heterogeneous than the augmented Washington Consensus suggests.

This emphasis on pragmatism and experimentation sounds perfectly sensible, and yet the faddishness that governs development and growth economics gives me pause. Rodrik is hardly the first economist in recent years to suggest a diagnostic approach to policy prescriptions. Even though they disagree on almost everything else, both Jeffrey Sachs and William Easterly stress the power of diagnostics and local “ownership” of development policy in their prescriptions on how to promote growth. I smell a fad here. The question is whether this fad is rooted in an improved understanding of the political economy of development, or is simply another new trend to replace passé but goodies like Harrod-Domar or the “big push“.

As a political scientist, One Economics, Many Recipes proved to be a bit more frustrating. It’s far from clear whether the political organizations that Rodrik is counting on are up to the task. The book asserts that there are “pockets of bureaucratic competence in all states.” Conflict-ridden states excepted (and this is an important exception in a book about helping out the bottom billion), this is undoubtedly true. Scholars of political organizations, however, might suggest that these areas of competence exist precisely because their existing missions are well-defined and clearly constrained. They might not want to branch out. Indeed, studies of successful agencies show that they will likely refuse new, high-profile tasks unless they are confident that their new tasks coincide with their current capabilities and practices. The possibility of failure, and a tarnishing of reputation, is the source of this risk aversion. Less successful agencies, in contrast, are more willing to take on riskier initiatives, as a way to grab power and enhance their reputation for competence.

The discussion of globalization and global governance also contained a few contradictions. The first is whether economic globalization severely restricts the policymaking autonomy of the nation-state. In chapter four, Rodrik assures us that this is not the case. Indeed, he assures us that states retain a wide array of possible “industrial policies” that could be pursued by governments. This includes signing preferential trade agreements. However, by the time we get to chapters seven and eight, Rodrik thinks the constraints of globalization are much stronger. In the extreme, he posits a governance “trilemma,” in which it is impossible to reconcile global economic integration, mass politics, and national governance.* Which is it?

As someone who just wrote a book on international regulatory regimes, my answer is “neither.” Globalization has not really transformed international relations. Governments that make the rules for large internal markets (the United States and European Union) retain the ability to determine the course of global regulatory and technical standards. Large markets have a gravitational effect on smaller actors. Their market power – and implicit coercive power – shape the preferences of smaller states and private producers. Simply put, when it comes to the setting of standards, great powers are price makers and not price takers. At the current moment, when the United States and European Union agree on a common set of standards, there will be effective coordination; if not, there will be no effective coordination. The important thing, however, is that it is the large market governments who retain the largest possible level of policy autonomy.

This leads us to the second contradiction. One Economics, Many Recipes devotes a great deal of effort to recognizing that for development policies to work, they need to be incentive compatible. China’s agricultural reforms – cited numerous times throughout the text – were ingenious because they created a “two-track” system in which the winners did not affect the pre-existing set of politically entrenched actors. Rodrik takes great pains to try to devise metaprocesses through which governments can experiment with growth-promoting policies without falling into Olsonian or Stiglerian traps. Whether sunset policies or deliberative councils would actually work is open to question. At domestic level, however, at least Rodrik gets that the incentive problems need to be factored into the equation – a vast improvement over the pie-in-the-sky proposals of Sachs or Stiglitz.

When we get to the global governance level, however, there is no discussion of incentive compatibility. The status quo allows the United States and European Union to dictate a wide array of regulatory strictures on smaller governments through a welter of multilateral and bilateral arrangements. Over the next decade or so, countries like China and India will be able to do the same. Crudely put, what’s in Rodrik’s proposals for these countries? Why would they voluntarily relinquish their power and influence for a nebulous form of “global federalism”?**

*Furthermore, this trilemma seems falsely posed. Precisely because governance takes place at the national level, and because the governance of the large market states operate by mass politics, there won’t be a movement towards Rodrik’s “complete economic integration” without a lot more consensus than exists today.

** On p. 208, Rodrik posit what he believes to be a Pareto-improving decision rule in which a “simple majority rule” decides a common global standard. A simple majority of what? States? Populations? Output?

In some joint work with Jim Johnson I have pursued an analysis of the relationships among institutional choice, experimentalism and democracy. On our account, politics in most modern societies largely consists in contests over the contours and distributive implications of shared institutional arrangements. In any country there exists a plurality or range of feasible institutional forms. In addition to markets and democratic decision-making procedures this includes, but is not limited to, bureaucracy, adjudication through courts, private associations, economic hierarchies and social norms. Once we recognize this plurality, the task of choosing which kind of institution should best coordinate our social interactions in any particular setting appears quite daunting. This in turn raises the difficult task of discerning how, in such circumstances, any heterogenous constituency of actors, with their diverse and often conflicting interests, values and commitments, might determine which array of institutional forms to use to coordinate ongoing interactions across various social domains.

This task turns out to be a very complex one. As standard textbook accounts make clear in the case of markets, any available institutional form will operate effectively and thus generate normatively attractive outcomes only under particular (and in principle specifiable) conditions. In his book Rodrik puts great emphasis on the claim that the effectiveness of any set of economic institutions is context specific. It is important to understand what all is entailed by this claim. Most obviously, it implies that institutional effectiveness is a function of the social, economic and cultural factors that characterize a particular country. However, it also implies that institutional effectiveness depends on the presence of certain preconditions, such as, in the case of markets, the structural and participatory conditions necessary for effective market competition. So, in any particular context the task of institutional choice involves both the selection of an institutional type and a commitment to foster and maintain the conditions necessary for effective institutional performance.

Here it is important to emphasize that this does not merely characterize the choice of economic institutions. The effectiveness of any type of institution will be a function in large part of the conditions in which it operates. And to further complicate the task there has been much less systematic research about the effective preconditions of institutions like democratic decision-making and courts than about markets. Nonetheless, the task of institutionalizing democratic and judicial arrangements require that we make a commitment to establishing and maintaining our best understanding of the conditions that make democratic governance and courts effective in achieving the goals we impute to them.

This is where experimentalism enters the picture. We engage in institutional experimentation in order to generate knowledge about the effectiveness of institutions in various social contexts. Theoretical analysis can make important contributions to our understanding of issues of institutional performance but, as Rodrik forcefully argues, it alone cannot provide definitive answers to questions of actual effect. Such answers can only come from the cumulative experience of using the various institutions at our disposal. In the end we trust or value experimental outcomes insofar as they emerge under proper conditions and we expend much effort in monitoring those conditions.

The importance of “proper conditions” highlights the fact that experimentalism is itself an institutional choice. The type of experimentalism that Rodrik advocates will only be effective if the conditions are in place to let the process work as we intend it. To foster and maintain these experimental conditions we require some kind of institutional framework of monitoring and assessment. Here the logic of institutional experimentation starts to resemble an infinite regress of institutions and conditions and metainstitutions and metaconditions, etc.

But this is where the central importance of democratic governance for the type of experimentalism that Rodrik envisions becomes evident. We need institutions of democratic decision-making to be able to stop the dynamic of moving back from coordinating institutions and effective coordinating conditions to the monitoring institutions and effective monitoring conditions that allow these institutions and conditions to work, to the meta-monitoring institutions and meta-conditions, and so on …..

Any pragmatic account (such as Rodrik’s account) that wants to avoid this infinite regress has to be grounded in some institutional arrangement that can satisfy the burden of self-regulation. Institutions of democratic decision-making are the only arrangement that offer such a possibility through the logic of their own operation. They are the one type of institution that can serve as the framework for institutional experimentation (including the tasks of monitoring conditions and assessing outcomes) and, crucially, monitor whether the conditions of their own effective operation actually obtain. This follows from an important characteristic shared by democracy and the logic of experimentalism: reflexivity. Reflexivity is a crucial feature of experimental procedures. And, as I have argued together with Jim, it is a basic characteristic of effective democratic governance.

With limited space here I cannot set out the full details of our argument, but its thrust is as follows. The reflexivity of democratic arrangements derives from the fact that political argument – again, under the appropriate conditions of freedom and equality – requires relevant parties to assert, defend and revise their own views and to entertain, challenge or accept those of others. It derives, in other words, from ongoing disagreement and conflict.

In this respect democratic institutions clearly differ from market interactions where, in the case of disagreement parties simply “exit” to seek more favorable terms of exchange elsewhere while in cases of agreement they simply trade without concern for the efficiency or distributive features of aggregate outcomes. Market interaction is decentralized in the sense that those who are party to any particular interaction are charged neither with reviewing or monitoring in an ongoing way the conditions under which the institution of exchange itself operates nor with assessing the consequences of how broader institutional arrangements operate.

It is just here that democratic institutions enable a level of reflexivity unavailable in other institutional forms. For political argument not only allows members of a democratic polity to collectively revisit past substantive decisions, it also allows them to collectively reconsider and revise the terms of their ongoing interactions. Moreover, because democratic arrangements structure political argument so as to allow the emergence of new ideas, perspectives and interests and, thereby, new constituencies and oppositions, this reflexivity has an endogenous, dynamic dimension. In practical terms it is less useful to characterize political debate as inducing agreement than to see it as structuring disagreement. The grounds for the claim that democracy is reflexive, then, emerge when we see how, when it is successful, it structures disagreement and, thereby, potentially fosters still further disagreement.

This, of course, does not guarantee that democratic governance will function to foster and maintain experimentalism as well as to stabilize the dynamic of effective institutional choice. The claim that I am making is, rather, a possibility argument. What I mean to emphasize here is that democracy, under the appropriate conditions, offers a better opportunity of achieving these necessary goals than do other available alternatives.

The fundamental importance of this is brought home when we acknowledge that institutional choice will commonly involve disagreement and conflict. Some sources of conflict may involve differences over interests and values, differences in the distributional consequences of institutional choice. Other sources may merely involve differences of opinion about the best way to proceed in the face of uncertainty about the present and the future. When such disagreement inevitably arises, the success of any institutional framework will depend on our ability to manage conflict and facilitate coordination wherever possible. Thought about in this way, a commitment to experimentalism is, like a commitment to democracy, really another instance of a more general commitment to ways of coordinating our various forms of disagreement.

One Economics, Many Recipes creatively and persuasively sets out a case for the benefits of this kind of institutional experimentalism for economic development and growth. As Rodrik continues to pursue these questions, I would offer two friendly suggestions. First, we need to give greater attention to what he categorizes as “the institutions of conflict management.” Near the top of this agenda should be questions about the incentive effects of various institutional arrangements. For example, what incentives are necessary to get people to participate in such an experimental process? And what incentives are necessary to encourage them to accept both the costs and the resulting outcomes of the process? Second, Rodrik’s first best proposal envisions experimentalism at the global level. If this is desirable, then we need to think hard about how we will foster and maintain conditions of effective experimentation in the international context. This strikes me as a much harder question than anyone presently writing on these issues seems to think.

There are many versions of what the new growth economics was all about, including those of Paul Romer, “The Origins of Endogenous Growth,” Journal of Economic Perspectives, Winter,1994, and Olivier Blanchard, Chapter 30, “The Story of Economics,” Macroeconomics, 5th edition, Prentice-Hall, 2007. Here’s my interpretation: Lucas’ powerful rhetoric depended on asking a series of questions, not answering them. In Robert Solow’s model of economic growth, dominant for thirty years, nothing much could be done about growth, aside from sound macroeconomic management. In Lucas’ view, which was expressed in the formalisms that were becoming standard in economics in the 1980s, technological improvements (and the institutional arrangements that made them possible) could not be taken for granted. He pointed to immigration flows to pose a puzzle: why did people throng to cities, and to highly developed countries, instead of the other way around? Why didn’t capital move freely to less-developed areas around the world? Lucas was interested in trade and growth. The hypothesis he advanced was that the engine of growth was human capital accumulation; that people went to cities because that was where the valuable skills were (just as money was in the banks).

Of course, practically as Lucas spoke, the pattern was reversing. Highly skilled people and capital were going back to poorer areas – to Ireland, to China, to India. Soviet-style communism was crumbling. Globalization was swinging into high gear. But meanwhile he had opened the door to a different answer, advocated chiefly by his student, Romer: that knowledge, nonrival and often partially excludable, was important, too, and that it possessed quite different economic attributes than goods do. Economists argued about it for a time, before the best among them agreed to stipulate that knowledge had an economics of its own, quite different from the economics of things. They left behind a handful of researchers to work it out, and moved on to the investigation of the institutional apparatus and social framework that created and distributed new ideas around the world.

Some years later, David Kreps described this sort of an evolution in terms of an hourglass, an image he attributed to Romer. Before World War II, Kreps said, economics had consisted of many different fields that had grown up in substantial isolation from one another: trade, development, economic history, labor markets, public finance and so on. These semi-autonomous discussions, with their focus on typologies and institutions, sounded like so many regional dialects, some of them all but incomprehensible to others. But after the war, as the advancing salient of economics – mainly macroeconomics and general equilibrium theory—embraced more formal methods, mathematical models in particular, the new techniques gradually were extended into one area after another (a movement often experienced as “colonization” by those previously working in the field). Gradual standardization of methods was the result. Previously disparate sub disciplines gradually came to sound more like branches of a single common (methodological rather than topical) tongue, wrote Kreps. And when, as was always the case, the new dialect of mathematical modeling lacked the appropriate vocabulary to discuss important topical features of the landscape, “rather than speak in an unfashionable dialect, some things were just not discussed,” at least by those who felt as if they were on their field’s cutting edge. Gradually techniques were developed to bring these familiar topics under the lens of the new mathematical economics and broaden the discourse.

Hence the image of an hourglass. The vertical axis represents time, and the horizontal axis the scope or breadth of economics. As time passes, we first see a narrowing of topical concern as the language is unified and then a widening of concerns as the language develops. Throughout, it is important to note, the discipline of economics did not entirely abandon subjects such as institutional economics. Pockets of resistance to the evolution persisted; in some overseas locations and in some domestic departments, they dominated. The hourglass describes roughly the development of orthodox or mainstream economics, and, (at that), primarily in the United States. (Daedalus, Winter, 1997)

The excitement over the new growth theory has now passed on to “new” institutional economics and, more generally, to the “new” (meaning more formal) political economy. But while it lasted, the excitement had at least two unfortunate side-effects. The first was to greatly overshadow development economics as a discipline. Beginning in the years after World War II, development economics was an important new field, populated by original scholars who were thought of as giants – Albert Hirschman, Alexander Gerschenkron, W.W. Rostow, W. Arthur Lewis, Theodore Schultz, John D. Black, Peter Bauer. But while those scholars attracted plenty of fans, they didn’t train many students of the next generation who could compete as stars with those who identified themselves as (mathematically trained) growth economists; Mancur Olson, Peter Timmer and Anne Krueger were probably the best-known among those who won prominence. Others, like Henry Rosovsky, left the field for other responsibilities.

The other side-effect in the 1980s and ’90s was to add a little momentum to the impulse to send a lot of bright young theorists out into a world that was rapidly opening up. They were to serve as “country doctors.” The content of their black bags consisted mainly of a understanding of the fundamentals of sound macroeconomic management described in 1990 by John Williamson as “the Washington consensus” and ordinarily interpreted as One Size Fits All. Central to the bedside manner of these advisers was their ability to speak fluently of the latest advances on the research frontier; detailed knowledge of the country in question was not required. Jeffrey Sachs, Lawrence Summers and the late Rudiger Dornbusch were among the most prominent. Countless teams were mobilized by the International Monetary Fund and the World Bank as well. And even in a case where advice was being given by a theorist with intimate knowledge of the local economy, Andrei Shleifer, a Harvard University professor who had grown up in the former Soviet Union, the project collapsed amid charges of corruption among its leaders, a disaster for both US foreign policy and for Harvard.

Rodrik’s heart has been in development since he started, at Princeton’s Woodrow Wilson School of Public Policy more than twenty-five years ago, but he recognized immediately that he couldn’t hang out a shingle except as a full-fledged practicing member of the community of mainstream economics – hence the Princeton PhD. Throughout the years in which the triumphant “Washington consensus” dominated, Rodrik taught, published and worked around the world on development problems, mostly behind the scenes. He retained his Turkish citizenship. In 1996, he moved from Columbia University back to Harvard, where he had been an undergraduate, and quickly built the Kennedy School’s MPA in International Development into a leader in the field.

Rodrik’s task now, as I understand it, and that of the many other economists in his community around the world, is to rebuild development economics on the firmer foundation of the new, more cosmopolitan economics – all the various “new” economics that have emerged since the 1970s, when game theory and decentralized stochastic general equilibrium models became part of the normal graduate student toolkit. He co-chairs Harvard’s Growth Lab with Philipe Aghion, Harvard’s leading growth theorist, and the two teach development together. In Many Recipes, he repeatedly demonstrates his familiarity with the finer points of theory (and they become fine very quickly), taking account, for example, explicitly and implicitly, of a couple of important applied papers in the lit – Murphy, Shleifer and Vishny on the concept of the “big push,” Romer on the significance of an export-processing zone in Mauritius.

He tackles the literature even more directly in “Why We Learn Nothing Regressing Economic Growth on Policies,” a paper too technical to be included in the book but available on his website, even more powerful for its elegant take-down of the economists’ equivalent of digging holes and filling them in. These cross-country regressions were a outgrowth of the new theories of growth (if particular policies could affect the growth rate, why not compare their effects in countries all around the world? Especially since a great compilation of data on production, income and prices in 188 countries, knows as the Penn World Table, had just become available?

Rodrik’s chapter on growth diagnostics, with Ricardo Hausmann and Andrés Velasco, is the heart of the book. There may be other ways to write the decision tree they have devised to identify the constraint on growth of a given country and identify the most binding one – it seems to me that human capital formation is under-stressed – but as a means of disciplining conversation about the experiences of disparate countries, I suspect it cannot be surpassed. It is, in embryo, a contribution equivalent in many ways to the Penn World Table, which also was devised by a handful of economists working at a distance from Washington, in that case at the University of Pennsylvania. Growth diagnostics deserves to be taken up and systematically elaborated by the World Bank, the United Nations or some other agency concerned with global development, s a means of getting beyond the platitudes of “the Washington consensus.”

I especially like the concept of national “self-discovery” that Rodrik identifies as being the nub of the problem in, say, El Salvador. Clearly innovation is what is required if low levels of entrepreneurship and private investment are to be reversed – new markets for new goods, especially since the successful products can be scaled up for sale in the world market (which is the essence of new growth theory). But new ideas are easy to imitate, hard to protect. What it that El Salvador can uniquely trade in the world economy? Not just coffee, surely; that grows just as well in a dozen other countries around the world. Rodrik is particularly good at drawing out the implications in chapter four, “Industrial Policy for the Twenty First Century.” Most significant instances of product diversification are the result of collaboration between governments and the private sector, he says, in East Asia and in Latin America. (He might have added that the same is true of the United States and Europe, too.) What’s needed is to understand much better the differences between success and failure.

And this brings me back to Robert Lucas. What was so startling in 1985 about “The Mechanics of Economic Development” was the frank and surprising admission by the leading theorist of the University of Chicago that building new skills was at the heart of the problem. Sure, Lucas imagined an austere world, in which there were only two goods, potatoes and computers. And yes, the two models he brought to bear were highly mathematical. But both led ineluctably to a possible role for government in fostering growth. In the first model, a subsidy to schooling would enhance development, he noted. In the second, an industrial policy focused on “picking winners” might improve matters. Picking winners was easy in the model he had written down, Lucas wrote: “If only it were so in reality!”

In those days, Harvard’s Kennedy School of Government and the business school across the river had a joint seminar discussing industrial policy that produced, among others, Robert Reich and Ira Magaziner. But Lucas’ talk changed all of economics. On my reading, Rodrik understands that – it is part of what he means when he writes that “social phenomena can best be understood by considering them to be an aggregation of purposeful behavior by individuals – in their roles as consumer, producer, investor, politician and so on – interacting with each other and acting under the constraints that their environment imposes.” Precisely because that he understands that mainstream economics, Chicago and Cambridge, now presupposes that industrial policy is as much a part of sound macroeconomic management as monetary or industrial policy, he is a regular rock star among development economists, quite able to stand toe-to-toe and slug it out on practical matters with any theorist.

First of all, Rodrik:

First, this book is strictly grounded in neo-classical economic analysis. At the core of neoclassical economics lies the following methodological predisposition: social phenomena can best be understood by considering them to be an aggregation of purposeful behavior by individuals – in their roles as consumer, producer, investor, politician, and so on – interacting with each other and acting under the constraints that their environment imposes. This I find to be not just a powerful discipline for organizing our thoughts on economic affairs, but the only sensible way of thinking about them. If I often depart from the consensus that “mainstream” economists have reached in matters of development policy, this has less to do with different modes of analysis than with different readings of the evidence and with different evaluations of the “political economy” of developing nations. The economics that the graduate student picks up in the seminar room – abstract as it is and riddled with a wide variety of market failures – admits an almost unlimited range of policy recommendations, depending on the specific assumptions the analyst is prepared to make … the tendency of many economists to offer advice based on simple rules of thumb, regardless of context (privatize this, liberalize that), is a derogation rather than a proper application of neoclassical economic principals

Now Unger:

[rethinking the traditional debate over free trade] is an intellectual task for which the present methods of economics are inadequate. It would be tempting to adopt a strategy of caution, insisting that economics, purged of abusive applications and restored to analytic purity, provides help, and imposes no obstacles, to such a campaign. In this book I reject that claim: its modesty does not make up for its falsehood. The practice of economic analysis inaugurated in the late ninetheenth century by Walras, Jevons, and Menger, which came to be labeled “marginalism” and which guided the mainstream of subsequent economic theory and culminated in the theory of general equilibrium, is not only insufficient to the execution of the task. It is also, in certain decisive respects, incompatible with it. If economics continues to swing between purity of analysis, retreating from all controversial explanatory and prescriptive ideas, and abuse of application, unjustifiably equating abstract conceptions like the idea of a market economy with particular contingent sets of economic arrangements, it will not open the way. It will stand in the way. There are many past and present varieties of economic analysis, from the old institutional economics to the new behavioral economics, that suggest different methods and directions. However, they have not developed – and maybe they cannot develop – into ways of dealing with the problems that are central to the argument of this book. Their characteristic inability to imagine the possible forms of economic life cramps their insight into its actual forms.

These quotes seem to reflect positions that are starkly opposed to each other. Rodrik is proposing that we can and must develop new ways of understanding trade and growth from within conventional economic theory – it’s the only sensible way of laying out the issues. Unger claims that not only can conventional economic theory not help us to do this, but conventionally unconventional forms of economic theory such as behavioural economics can’t do this either. Nonetheless, I think that Rodrik is closer to Unger than he presents himself as being (similarly, Unger is much closer to Rodrik and conventional economic reasoning than he says he is, but that’s the topic for another blogpost). Rodrik provides an account of economic institutions that in many places rests less on neo-classical analysis than on a non-conventional account of institutional experimentation in a world characterized by uncertainty. Indeed, both Rodrik and Unger give us visions of international economics that deviates from the conventional account in two ways. First, they both provide pragmatic accounts – they are both much less interested in a Procrustean fitting of the world to an abstract theory than in figuring out what bits of theory help us to understand real life problems. Second, both explicitly acknowledge the primacy of politics – the market shouldn’t be seen as a replacement for political decision making, but rather embedded in a political context where important collective choices are made through democratic means.

Enough about RodrikandUnger – what does Many Economics, Many Recipes have to tell us?? First, even I don’t think that Rodrik delivers a systematically neo-classical book, he does very useful work, especially in the early sections, in clarifying the subtleties of the neo-classical approach, and in disentanglng it from the brutish simplifications of the so-called Washington Consensus. As Rodrik points out, there is no necessary reason that the latter follows from the former. Not only are the Consensus’s prescriptions for institutional change – market liberalization, privatizating everything that moves, deregulation – not the only ways that we might think about reforming economies to improve economic growth, but they don’t seem to work very well. Our experience of economic reform suggests that many of the countries that have embraced the Consensus most enthusiastically (mostly in Latin America) have done, by and large, rather dismally, while countries that have adopted different sorts of reforms have done much better. This isn’t conclusive proof that the Washington Consensus is wrong – there are lots of confounding factors – but it is strongly suggestive. Nor, as Rodrik discusses at length, is the Washington Consensus the only – nor the most attractive – way to apply neo-classical principles to economic development.

Rodrik’s alternative approach is likely to annoy both adherents to the aforementioned Consensus and many of their critics. While Rodrik argues that the drafters of economic reform need to be sensitive to context, he wants them to be sensitive in quite specific ways. He would like them to use neo-classical tools of analysis, but to think first about (a) which problems need to be tackled when, and (b) to think carefully about the possible unanticipated repercussions of reform. First, he suggests, you need to analyze what are the most important constraints on growth in a particular economy. Second, you need to analyse the specific distortions that are causing these constraints. Third, you need to think about policy instruments that can target these problems narrowly rather than trying to change everything at once. Fourth(he doesn’t state this as part of his decision tree, but it’s an important part of his argument), you need to make sure that whatever reforms you advocate don’t have unanticipated repercussions elsewhere. The broader effects of reforms in a specific area (such as property rights or incentives to grow food) will vary between countries with different institutional settings, and second-best solutions that don’t badly disrupt other parts of the economy are likely to be vastly preferable to first-best solutions that do. Finally, he argues (foreshadowing the second and third parts of the book) that short term spurts in economic growth aren’t that uncommon, but they don’t necessarily mean all that much either. What you need if you want to create long term economic growth is to institutionalize economic success by (1) encouraging diversification of trading sectors through appropriate public sector strategies, and (2)ensuring that domestic institutions of conflict management are strengthened.

This is an unusual set of prescriptions for an economist to be giving, but it doesn’t deviate far from neo-classical orthodoxy if it deviates at all. It merely applies it in somewhat unorthodox ways. Where Rodrik begins, in my opinion, to really stray from the traditional account is in Chapter Four, the beginning of the section on institutions and industrial policy where he fleshes out what he means by appropriate public sector strategies and strengthening institutions of conflict management. After taking some entertaining swipes at the fainting spells that industrial policy produces in most economists (he points out in passing that many currently fashionable policy recommendations such as export zones are in fact industrial policy under a new label), he gets down to talking about why he thinks that states should be engaged in industrial policy, and how they should be doing it.

The why comes from standard economic reasoning – it’s an incentives problem. Discovering new activities or products that can profitably be produced in a given economy is costly, and only a small fraction of the benefits can be captured by the entrepreneur who succeeds in finding such an activity or product. Therefore, we may reasonably expect that what Rodrik and his colleague Ricardo Hausmann call ‘self-discovery’ – the discovery not of fundamentally new products, but of products that are suited well to production under local conditions – will be undersupplied. Thus, there is a case for the government to come in and subsidize investments in non-traditional industries.

Rodrik’s specific account of how this should be done, however, doesn’t really rely on standard economic reasoning. And this is for good reason – economics, despite some significant advances, still has fundamental difficulties in understanding innovation because it involves decision making under uncertainty rather than risk. Thus, Rodrik resorts instead to a thoroughgoing pragmatism, grounded in common sense rather than in economic theory, to make claims about how self-discovery can best be promoted. Rodrik is certainly still sensitive to incentive problems, such as the risk that any industrial development agency will be subject to regulatory capture. However, equally (and arguably more) important in his account is the need for a process of pragmatic deliberation in which businesspeople and bureaucrats engage with each other to figure out what errors government is making, and how it can engage in targeted financial and logistical support and coordination for new activities that these sets of deliberations identify as likely candidates.

In short, the core sections of One Economics set out the virtues of a kind of pragmatic deliberation that can better foster self-discovery. Where standard economic theory enters in, it is as a corrective to the risks of regulatory capture. Attention to incentives is important if we are to design institutions to minimize the likelihood of collusion among the bureaucrats and business people who are involved in deliberation. But as Rodrik notes, there is a balance to be struck – trying to make regulatory capture impossible would rule out the information flows and processes of experimentation and argument that allow the government to help address the underlying problem of self-discovery. Attention to static incentives can help us avoid certain pitfalls, but actual discovery involves complex processes of deliberation and conversation. Interestingly, Rodrik borrows some of his arguments about deliberation from Charles Sabel, who is vehemently opposed to standard economic theory (he is a strong constructivist who doesn’t believe that anything resembling stable interests or identities exist). While I don’t think that Rodrik’s argument requires him to buy into Sabel’s stronger claims (there are more rational-actor-friendly accounts of pragmatic deliberation than Sabel’s out there) his use of Sabel’s ideas suggests that he is less wedded to the neo-classical approach than his opening statement would suggest.

This is in no sense whatsoever a bad thing (when you’re looking to give practical advice to policy makers, you shouldn’t let abstract theory get in your way when it’s unhelpful or irrelevant) – but I’d like to see more in the way of micro-level grounding. If neo-classical economics doesn’t provide us with a good grip on how self-discovery is likely to occur, there are other theories out there that at least provide some initial ideas of how best to think about innovation. Arnold Kling has already claimed Rodrik as a neo-Austrian. Economic sociologists also have some interesting things to say about these issues. Finally (and my personal preference) the more mathematically grounded variants of complexity theory (people working on the consequences of network topology for innovation, and agent based modelling as a means of capturing the importance of heuristics) have interesting things to say that might help flesh out Rodrik’s practical advice, and give it more analytic bite.

Finally, it’s useful to highlight a more subtle way in which Rodrik deviates from the usual economic account – his discussion of the relationship between institutions and democracy. Here, even if the difference is one of normative position rather than explanatory focus, it’s still quite important. The new institutional economics is strongly biased towards functionalist explanations (in which institutions come into being to fulfil certain broadly valuable functions), and towards explanations that fill inconvenient holes in conventional economic theory without challenging the fundamental emphasis on the primacy of markets as a means of social choice. This approach is the result of attempts from Coase through Williamson to(rather uneasily) North to explain how institutions can support certain kinds of functions that the market needs to work, without at the same time undermining basic claims about the virtues of freely functioning markets. This approach regularly slides from examining how political institutions may support market exchange to the tacit or explicit normative claim that political institutions are primarily valuable and good insofar as they support market exchange. It thus pushes for a quite narrow vision of politics (in which the state limits itself to protecting property rights, supporting impersonal exchange and so on), and in which democracy is seen as being rather ambiguous (it is good insofar as it limits the predatory aspirations of the state, but bad insofar as it allows for either interest groups or populist politics to interfere with market processes). Markets always come first.

While Rodrik favors some of the same institutions as do standard new institutional economists (e.g. effective property rights), it seems to me that his overall emphasis is quite different. This comes out most clearly in his discussion of trade, where he stresses that it is a means to an end rather than an end in itself. Democracies may legitimately choose to value other things than trade expansion, such as environmental and labour standards, and they should be allowed to do so. In Rodrik’s words:

Trade serves at best as an instrument for achieving the goals that societies seek: prosperity, stability, freedom, and quality of life. Nothing enrages WTO bashers more than the suspicion that, when push comes to shove, the WTO allows trade to trump the environment or human rights. And developing countries are right to resist a system that evaluates their needs from the perspective of expanding world trade instead of alleviating poverty

It may be that there is a greater trade-off than Rodrik acknowledges between democracy and economic growth (Adam Przeworski suggests that Rodrik’s empirical claims about this relationship are hard to substantiate given the virtual impossibility of establishing the direction of causation from available empirical evidence). But even if this were true, Rodrik’s fundamental claim for the primacy of democracy rests less on its economic benefits than its normative attractiveness. Over the very long run, people should support a kind of global federalism (which Rodrik distinguishes sharply from world government), because it would allow them to exert democratic control over choices that are currently denied to them under existing multilateral institutions. Over the shorter term, trade rules should be changed so that they accommodate diversity better.

Reversing our priorities would have a simple but powerful implication. Instead of asking what kind of multilateral trading system maximizes foreign trade and investment opportunities, we would ask what kind of multilateral system best enables nations around the world to pursue their own values and developmental objectives

Furthermore, these different choices and values are worthy of respect precisely insofar as they reflect democratic processes of choice. Rodrik emphasizes that national standards should receive presumptive respect only if they are made by democracies, and thus reflect some reasonably fair process of choice and deliberation.

I hope Rodrik won’t be offended if I say that this is the kind of claim one expects to hear from a political theorist, not an economist. It suggests quite emphatically that politics (more precisely democratic politics) should have primacy over markets. It points to the need for a set of international institutions that are not only better geared to support economic development, but that are democratically accountable either through national governments, or (perhaps in the future) through a combination of national governments and supranational democratic bodies. Reading through my own particular set of cognitive biases, it seems to me that a more accurate title for the book would be “One Economics (plus some extra-economic reasoning, Many Politics, Many Recipes.” Or perhaps instead, Rodrik should write another book or long article that draws together the threads of his claims about deliberation and democratic choice – while there seems to me to be an underlying consonance between his prescriptions for industrial policy and his arguments about how best to reform the multilateral trade system, much of it is buried in footnotes and asides. Either way, this is a provocative and important book that should be read not only by economists, but by political scientists, political theorists, economic sociologists and anyone with an interest about how global economic processes do and should work. Most of these ideas have already been published elsewhere – but when brought together they pack a normative and analytic punch that they didn’t as individual pieces. Good stuff.

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.

Past attempts to solve this problem can, for the most part, be identified with one of two polar extremes, solutions that involve pervasive and persistent government intervention, and solutions that rely upon extreme laissez faire market-oriented policies. Neither of these approaches has been very successful, and the book argues for a different approach that combines these extremes and allows market forces to operate in an environment shaped by government policy. Under this combination approach the government in partnership with the private sector uses industrial policy and institutional change to strategically kick-start, coordinate, and sustain economic activity.

If the barriers to development are difficult to identify, what should you do? One approach is follow a set formula such as the Washington Consensus. This provides a recipe to follow that is grounded in economic principles, relies upon markets to direct development activity, and is intended to be robust enough to work in a wide variety of circumstances. Unfortunately, there is little evidence that such a formulaic market-based approach works across the broad sets of conditions and institutions that exist in undeveloped countries. And the opposite approach, a heavy-handed, top down, highly interventionist, dictatorial approach does not seem to be able to find the keys to successful growth either.

The message is that too much reliance on either the government or the private sector has not, in general, produced the desired outcome of sustained long-run growth. To overcome this, the book recommends prescriptions that improve the information flow between the private and public sectors to reveal the important barriers to development. This calls for a collaborative effort between the government and the private sector devoted to identifying and removing the biggest impediments to entrepreneurial activity. A main point of the book is that although there are certain broad principles that guide the choice of industrial policies and institutional design, there is no one recipe that works for all countries. The endpoint is sustained economic growth, and the prescriptions are firmly grounded in traditional economic principles, but the exact path a country takes to reach its long-run objectives depends upon its unique circumstances and generally involves a combination of orthodox and unorthodox institutional practices.

While the first stage seems relatively easy to bring about, getting to the second stage, i.e. sustaining growth, is more difficult (the book lists over eighty instances of growth spurts, but only a few of those have been sustained over a long time period). As the book says, “Sustaining growth is more difficult than igniting it, and requires more extensive institutional reform,” and much of the discussion in the book is devoted to explaining a systematic approach to institutional design that promotes the necessary dynamism to sustain growth over the longer term.

Unfortunately, the general principles that explain the difference between the countries who make it to the second stage and those who do not are unclear. One of the book’s messages is that such systematic differences are difficult to identify due to unique conditions in each country, but since making it to the second stage is the goal of development policy, I still wish we had a better sense of the factors that explain why most countries are unable to make the transitions needed to sustain economic growth.

Perhaps the book’s discussion of a paper by Imbs and Wacziarg (2003) in the section on institutional design is related to this problem of determining which countries will survive the transition into the second stage. The paper estimates a typical development pattern and finds that development follows two distinct stages, an initial stage where sectoral employment and production become less concentrated and more diversified, followed by a second stage where this reverses and there is increasing sectoral concentration as the economy grows. In addition, the turning point is estimated to occur, on average, at relatively high levels of per capita GDP. Thus, graphing sectoral concentration against GDP per capita reveals a U-shaped pattern and, as Imbs and Wacziarg stress, the U-shaped pattern “is an extremely robust feature of the data.” Based upon this they conclude that “Countries diversify over most of their development path”.

This conclusion is based in part upon the result that the minimum of the U-shaped development path is at a relatively high level of income, but there is quite a bit of variation in the minimum across countries (partly explained by openness), and it is lower after 1980. In addition, the minimum is the point when the forces that are increasing concentration begin to dominate the forces that are decreasing it, but that is not necessarily the point where these forces begin to change.

What I am suggesting is that perhaps this process of clearing out unproductive, unprofitable firms is an essential part of getting to the second stage, and that this process must begin fairly early in the development process, earlier than the minimum point of the U-shaped curve. Initially, the clearing out doesn’t fully offset the growth spurt and there is increasing sectoral diversification overall, but eventually the forces of consolidation come to dominate the forces of diversification as successful firms gain strength and this causes sectoral diversification to end as the economy passes by the minimum point on the U-shaped development curve. Without this process in place to clear the path for stronger firms to emerge, and without it beginniing fairly early in the devekopment process, growth stagnates before the country ever reaches the minimum point on the U-shaped development curve.

Perhaps it is the failure of this cleaning out process to operate due to government ownership of some firms, government protection of certain favored sectors, regulation, labor restrictions, etc., that is a factor in preventing countries from getting to the second stage. The book recognizes barriers such as these can impede development and one of the key guiding principles the book gives for partnerships between the public and private sectors, and in building institutions to support growth is the creation and preservation of ‘dynamism.’ In this regard, among countries experiencing growth spurts, it might be interesting to find out what the sectoral concentration profiles look like for the countries that were able to make it to the second stage versus those that did not, particularly a comparison of measures such as exit rates. More broadly, however, the question is whether there are deeper connections between the U-shaped concentration curve that appears to provide a very robust characterization of the growth profile of developing countries, and the first and second stages of growth identified in the book.

And this brings me to my last point. Whether or not there’s anything to the conjecture above about stagnation due to the inability to clear out unproductive elements in the economy, a bigger message is that we need to learn more about the connections between the first and second stages of growth, i.e. about the transition itself. For example, what if removing the one or two most important impediments to jump-starting economic growth in the short-run is not the best means of getting to the second stage, or leads to a dead end where you cannot get to the second stage at all? Maybe some other development strategy involving the second and third most important barriers, say, won’t give quite as much boost initially, but gives the country a much better chance of surviving the transition and sustaining growth over the longer term. The example is simplistic, but the point is that this is a single, interconnected problem, not two separate problems, and the first stage must be devoted to bringing about a successful transition to the second stage. The book does a great job of listing the guiding principles for each stage, and of describing how to design institutions to sustain growth, but I would like to see the connections between the two stages, particularly how to set conditions in the first stage so as to make the second stage more likely, explored in more depth. As noted above, the kick-start phase seems relatively easy to bring about and there are scores of instances of this happening, but getting to the second stage is much more difficult and perhaps there is more that can be done to enable the transition to take place. In any case, since so many countries fail after growth is initiated, the transition is something we need to learn more about and this book provides a solid foundation from which to explore this issue further.