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09/25/2013

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Christine Pence

“Growth Strategies” by Dani Rodrik speaks to the importance of fieldwork when considering development economic growth strategies. While reading this paper, I immediately thought back to class last week, when Professor Casey mentioned economist Chris Udry at Yale University. Dr. Udry’s policy requiring that all prospective PhD students spend 18 months (I believe) conducting fieldwork in the country they seek to study before beginning the PhD program is a very good one.

Rodrik points to observations gleamed from looking at the history of growth. He says the policy reforms that lead to growth are both orthodox and unorthodox. While it is true that there are certain higher-order economic principles – property rights, market-oriented incentives, sound money, fiscal solvency – economic reforms must adhere to, these principles can be implemented in unorthodox ways. Additionally, he has observed that innovation does not travel well between LDCs. Therefore, the policy reforms that worked for one country will not necessarily work for another. Since stimulating growth depends on local circumstances, growth strategies require local knowledge of the country. While initializing growth typically does not require huge policy changes, we must ensure that the small policy changes that are required involve the correct policies for that specific country.

This is where the importance of fieldwork comes in. The only way to comprehensively understand a country’s economy is to experience that economy firsthand. In other words, armchair economics is not effective. Rather, economists need to immerse themselves with the people living in the undeveloped country. Doing so achieves many benefits: it allows for a full understanding of the priorities of the population; the attitudes of the people towards government, other countries, etc.; potential pitfalls of a particular economic reform can be identified before they occur; economist will better understand the social structure of the community (local elites, caste system, class); they can find areas of corruption, etc. Such information as I just listed is not attainable from halfway around the world. And even if it is attainable, one cannot appreciate its importance or significance accurately without understanding the community to which it applies.

madisona14

I agree with Dani Rodrick’s thesis that development economists should analyze institutional function—not form—in order to better understand pathways to development. Disproving the Washington Consensus, most developing countries have achieved growth through many different institutional practices. However, the main thread that runs through all of their experiences is that they have gradually opened their export—and eventually import—markets and increased domestic investment levels.

In my American Economic History class, we discussed a piece by Douglas North that argued that institutions (and colonial heritage) most influence development patterns. The British actually settled in North America—rather than in their tropical, malaria-infested colonies—and they brought a culturally-compatible institutional structure with them. Even though few Brits settled in the other colonies, Britain still implemented institutions. Many of these institutions were incompatible with the colonies’ various cultures, and thus the colonies struggled to develop. The Brits let a few Ghanaians serve in the colonial government prior to independence. Thus, Ghana had a smoother transition to independence than many other African countries because some of its officials understood the institutions and how to adapt them to fulfill Ghana’s needs.

Even in America, institutions must not conflict with culture in order for the institutions to be functional. Last week, I went to a lecture about the American welfare state, in which the presenter argued that current American policies, such as the bank bailout, ObamaCare, etc., are highly controversial because they abandon the American tradition of only dispensing welfare aid as disaster relief. Instead, these policies favor the European welfare system model. In order to have a highly-functioning economic and governmental system that is supported by the polity, a country must have institutions that are compatible to its own unique culture.

Olivia Davis

Rodrik’s discussion of the European Union serves as an exemplary case of similar economies working together. Although the members of the E.U. have varying cultural norms and economies, they are similar enough to converge into one trading bloc. The following news article deals with Turkey’s recent announcement that it may never join the E.U.:

http://thelede.blogs.nytimes.com/2013/09/23/turkeys-chief-european-union-negotiator-acknowledges-turkey-may-never-join-bloc/?_r=0

According to the article, Turkey recognizes that its bid to join the E.U. over the last decades may very well fail. European opponents of Turkey’s membership claim that the candidate is too different culturally and geographically from the other members. A primary difference stems from Turkey’s dominant religion, Islam, whereas most European countries predominantly Christian. Another fear is that Turkey did not sufficiently conform to the necessary democratic principles.

This news story brings a particular question to my mind: does the E.U. only accept members who already share the same ideals, even if it means sacrificing possible advantages to be gained from slightly different countries? For instance, the article mentions Turkey’s willingness to serve as a “bridge” between the E.U. and the Middle East if it were granted membership. Without the ways Turkey deviates from the E.U., it would not be able to create these potential ties with the Middle East.

As an alternative, Turkey plans to stay close to the E.U. and harness many of the trading bloc’s standards, according to the article. If Turkey mirrors the E.U.’s regulations, thus increasing their similarities, will the E.U. be more likely to grant Turkey membership? Furthermore, are Turkey’s structural differences too far from the E.U. for the country to even be successful after adopting the standards? Many uncertainties still remain concerning the future relationship between Turkey and the E.U. The possible outcomes vary greatly.

Colleen Paxton

Dani Rodrik discusses the challenges faced by implementing policy in LDCs. While policies cannot be transferred from location to location, they can be used as examples to experiment with. But successful policy requires understanding the people and the realities of the area and frequently unconventional elements lead to growth.

While growth can be jump started in the short run, it often will fail in the long run without a strategy. I thought Rodrik’s ideas about entrepreneurship and government were particularly interesting. There must be a balance between government doing too much and doing too little in order for entrepreneurship to occur. In Tuesday’s class, we discussed how savings and investment are necessary for growth in reality. Rodrik explores how to spur entrepreneurship activities when there is a low return on investment. He discussed the incentives used in South Korea and Taiwan of credit subsidies and tax incentives, respectively. The success of implementing growth comes from understanding the details and looking closer. South Korea and Taiwan look strategically alike from afar but upon closer understanding the incentives met the opportunities available.

Owenandrea

Rodrik’s point about the importance of democracy in selecting institutions to aid development was intriguing. He stressed the significance of democratic institutions and civil liberties “as meta-institutions that help society make appropriate selections from the available menu of economic institutions” (26). In light of his argument about how each country needs a different model of development based on its economic and political structures, letting the people who best understand a country’s workings decide what would be best for it makes sense.

However, the ill-management of democratic structures can hinder the long-term sustaining of economic growth of which Rodrik spoke. Rodrik said that while igniting growth is easy, sustaining it is both essential and more difficult. To the extent that democracy can interfere with the centrality and focus necessary to sustain economic structural changes, it could be pose challenges to sustained development. For instance, Rodrik described some of the institutional changes necessary for sustainable growth: monetary, fiscal, and other arrangements to deal with the business cycle and the problems of unemployment/inflation…[as well as] social protection, social insurance, and democratic governance” to legitimize market outcomes, to name a few (26). The high complexity and coordination necessary for such endeavors might become difficult when too many forces are able to work against each other. It is therefore a challenge for a democratic society to work together and be deliberate about how complex policies will work not just now but also 10 years from now.

Greta Witter

I found the discussion of institutions particularly interesting and worth considering further. Rodrik argues that economic convergence does not rely on institutional convergence; and yet, there are certain “high- quality institutions” which seem to ensure growth’s durability and sustainability. This conclusion is entirely in line with his argument that basic tenants of sound economic theory run throughout successfully tailored local policy implementations.
Rodrik certainly stresses the importance of policy-makers’ understanding of the locality, but the piece does not seem to delve beyond the political diversity of the world’s underdeveloped nations.
I would argue that certain social norms and cultural institutions are just as important hurdles and barriers to consider on the path to sustainable growth. In many LDC’s women are irrelevant to the formal economy, though their domestic work and informal contributions are vitally important. Would Rodrik agree that NGO and foreign aid campaign focus on these social inequalities are necessary to economic progress? Or would he counter that economic growth itself would pull women into the formal economy? Equality, of all sorts, seems to go hand in hand with development – not only is it important to consider a policy’s implication on the societal fabric, but also the challenges of an initially flawed fabric.

ShelbyLFlores

"By the late 1980s a remarkable convergence of views had developed around a set of policy principles that John Williamson (1990) infelicitously termed the “Washington Consensus.” These principles remain at the heart of today’s conventional understanding of a desirable policy framework for economic growth, even though they have been greatly embellished and expanded in the years since."

The statement above was the first thing that caught my eye in this article. Essentially, Western ideas were (and still are) seen as an ideal set of instructions to becoming a developed country. As others have mentioned above, a recurring theme of Rodrik's paper is that one cookie cutter set of instructions doesn't work in all cases. (This would make sense, as every country has its own unique history, geography, amount/type of resources, etc.) I would like to use the case of 1990s Argentina that will assert that one set of growth policies (including the "Washington Consensus,” even though it is supposedly a set of policies that all countries should strive for) doesn't work for all countries.

http://www.sss.ias.edu/files/pdfs/Rodrik/Commentary/Argentina-globalization-gone-too-far.pdf

Above is a link to another article by Rodrik about what went wrong in Argentina. During the 1990s, Argentina’s policies were “exemplary by the orthodox standards that neo-liberal economists advocated around the world…the country undertook more trade liberalization, tax reform, privatization, and financial reform than virtually any other country in Latin America.” And no other country tried as hard as Argentina to “endear itself to international capital markets.” While the Argentine case did have some experimental elements to it, it was “solidly grounded in theories expounded by US-educated economists, the US Treasury…[and] the World Bank and IMF.” And, as expected, Argentina’s economy took off in the early 1990s after decades of stagnation.

But then in the late 1990s, Argentina was hit with a series of external shocks (Mexican peso crisis in 1995, Asian crisis in 1997-98, and the Brazilian devaluation of its currency in early 1999) and economic growth turned negative. Foreign investors became worried about receiving payments on their huge liabilities incurred during the decade and “by the second quarter of 2001, Argentina’s country risk was rising relative to that of other ‘emerging markets.’” As a result, interest rates rise to very high levels and it became very likely that Argentina would default. By November 2001, people began withdrawing large sums of dollars from their bank accounts, turning pesos into dollars and sending them abroad, causing a bank run. Government enacted measures froze bank accounts for 12 months, allowing for only minor sums of cash to be withdrawn. The freezes caused numerous riots, and the president (de la Rúa) was quick to resign and flee the Casa Rosada via helicopter.

Ultimately, Argentina was a failed example of the “Washington Consensus.” There are some counter arguments that state because Argentina did not follow the rules to a tee, the result was one of the worst economic crises in the country’s history. However, I would counter those by restating the fact that one cookie cutter set of growth policies does not work in all countries. I’ll close with a quote from Rodrik’s Argentina article: “Despite the tremendous wave of neo-liberal reform that swept over the continent during the last two decades, only three economies in Latin America managed in the 1990s to outdo the performance they had experienced under the inward-looking, populist policies of the past.”

Gyung Jeong

Dani Rodrik notes that while per-capita income for the world on average, life expectancy, infant mortality, and literacy percentages has increased, there are certain countries that have pretty much stopped growth from the 1980’s. It is perplexing that while some countries such as China, Malaysia and South Korea have developed quickly and ended the century with high productivity levels, others, such as Latin America and Africa, have not been as successful. This leads the author to the question of “What do we learn about growth strategies from this rich and diverse experience?” In this question, Rodrik emphasizes on developing a broad understanding of the contours of successful strategies aimed at achieving economic convergence.
I agree with Colleen that this paper by Rodrik explores how to spur entrepreneurship activities with investment incentives. The example of South Korea reminds me of the lecture on Tuesday. Professor Casey mentioned that one of the reasons that South Korea was able to grow quickly in a short amount of time (GDP per capita was about 70 dollars in 1960s whereas it is over 30,000 dollars now) was that the government implemented the policy that asked people to save (or the incentives for investment) by looking closer. This was done successfully due to the understanding of the details and local knowledge. This leads to his argument that the real lesson is to take economics more seriously for growth strategies.

Lizzie Weston

I agree with Gyung and Rodrick that while many different polices have proven instrumental in different countries' growth, economic theory is very important in developing these ideas, however different they may be. Rodrick's last line in his article concludes "rule-of-thumb economics, which has come to dominate thinking on growth policies, can be safely discarded." This shows that while Rodrick knows the importance of economic theory, he also understands and explains in the second half of this paper that all countries are different and different policies are needed to support and sustain growth.
I very much like that Rodrick pointed at the local knowledge is imperative to designing an economic growth policy in a country. We as weathly westerners tend to believe that is we push our ideals and policies onto other countries, they will experience the same growth. This article points out that this is not always the case. China and other successful East Asian countries implemented policies that would have never been accepting in the US. However, because of the differing social climates and time periods, these policies proved successful. This is not to say that one mindset is better than the other, but that there are multiple ways to go about growth using the same core principles and goals. Rodrick supports policies that result in higher-order principles of sound economic governance—property rights, market-oriented incentives, sound money, and fiscal solvency. These pillars can come about in different way, and each country and situation needs to be looked at carefully in order to determine the right method. It is important to realize differences in governments, technology, and time periods in which growth strategies can be applied, and local knowledge can help in this effort tremendously.

Julia Murray

As others have said, I found Rodrick's argument about the importance of selective mixing of orthodox and unorthodox institutional reforms as appropriate to the current economic, political and social environment of a country to instigate and maintain growth particularly compelling. However, I also noticed that like any other recommendation for policy, Rodrick highlights the importance of not interpreting the paper's ideas in an extreme fashion. Rodrick highlights this point with the example of Argentina's experiment in the 1990's with a currency board. This example demonstrates that while unorthodox policy can often produce unprecedented positive impacts on an economy, it can also work against the current economic environment and cause more harm than good. Rodrick points out that "under better external circumstances, the credibility gained might have more than offset the disadvantages." While the failure of this policy itself would not have necessarily been detrimental to the Argentine economy, Argentina's reluctance to abandon the ineffective policy significantly damaged their real exchange rate.

The example of Argentina also underscores Rodrick's argument that policies and institutional reforms that work for one developing nation may not function similarly in another developing nation. As we have learned so far throughout the semester, it is important to be mindful of the differences among developing countries and avoid over-generalization.

Cirimu

I totally agree with Shelby’s exemplification of the failure of the “Washington Consensus” in Latin America, particularly in the Argentinian case as she points out. As the authors’ highlight, the main tenets of the Washington Consensus which are property rights, market oriented incentives, and macroeconomic stability are necessary for economic growth. However, there is not a specific way to achieve these goals. The IMF, the World Bank, and developing countries themselves have failed to realize that what has worked for the U.S. does not work to ignite growth in developing countries. Even what has worked for China will unlikely work in Latin America because they have different institutional structures specific to their socioeconomic and political context. For example, China’s Household Responsibility System is unlikely to work in Latin America due to the rampant corruption, and to the fact that the few land owners owning most of the lands are usually in government positions. Latin America needs another set of approaches that still need to be discovered. Unfortunately, current policy implementation in Latin America is mostly based on theories and approaches developed by Americans and Europeans economists and not by Latin American Economist who should be more familiar with the countries’ socioeconomic and political situation.
After reading this paper I am surprised that the IMF and the World Bank continue to enforce the standard recipe to “stabilize” the economies of developing countries in spite of knowing that its implementation might be more detrimental than beneficial to the targeted countries. This makes me doubt about the true function of these institutions in the world stage.

Margaret Klein

In this paper, Rodrik argues the importance of local knowledge on top of traditional economic growth strategy. He uses the Washington Consensus including its reforms as the structure for economic policy. While he agrees that this structure is extremely useful and successful, he also shows multiple examples of countries that use bits and pieces of this reform strategy and still manage to exhibit significant growth. He even cites unorthodox strategies, or strategies that contain some unorthodox components as successful economic reform. China is a major example in this paper because it instituted partial liberalization to many areas of its economy after seeing success in the agriculture sector, showing that the principles outlined in the Washington Consensus do not apply to all situations. There are certain institutions that must be in place in order for some of the policy recommendations outlined in the plan. I think with this idea that one reform outline does not work for every developing country. Policymakers must look at the institutions in place and determine which combination of reforms will work for that specific nation. This can help solve short-term economic reform, while giving way to additional reforms as outlined in the Washington Consensus for the future once the economy develops and the nation becomes more sustainable.

Vincent Kim

Rodrik’s assertion that countries need to acquire high-quality institutions to ensure a high standard of living (pg. 25) also interests me. In table 11, he lists some examples: property rights, contract enforcement, regulatory bodies, monetary and fiscal institutions, and social insurance. My questions would be these: how can a less developed country with a corrupt government build up these institutions effectively? Would the country need to invest in a large bureaucracy to implement these institutions such as in the case of South Korea? Rodrick also cited studies that indicated that countries build more resilient institutions when they modify their current ones rather than adopting the laws and systems from other countries (pg. 27). Does this mean countries should focus more on building up an educated workforce for government bureaucracy rather than getting consulting from the experts of other countries?

Also, how should countries gauge “socially desirable behavior on the part of economic agents” (pg. 25). Often there is conflict between the government and citizens on the issue of socially-desirable behavior. What comes to mind is how the South Korean government suppressed labor uprisings and protests in order to ensure savings and economic growth. Was it right that the government subdued protests for higher wages to secure economic growth in the long run? It is important how governments move forward and create and sustain institutions while keeping the citizens involved in the process.

Daniel Molon

In this paper, Dani Rodrik critiques the Washington Consensus, citing its poor performance when compared to the growth fostered in East Asia. Not only has the policies advocated by the Washington Consensus not proven to be as industrious as the strategies found in East Asia, but they haven’t even kept up with the growth from before they were implemented. One of the key reasons Rodrik points out for why it is difficult to implement previously successful strategies in various countries is the uniqueness of every country. He points out that Russia’s inability to replicate the success of China, and Argentina’s failed attempt at copying Brazil does not mean that China and Brazil have poor economic policies, just that their policies are applicable to their nation’s situation. Adjusting for localities is one overlooked aspect of economic policy, which has led to certain countries continued poor economic performance, as they try and follow policies advocated by the Bretton Woods Institutions. While the reforms advocated by the IMF and the World Bank have been approved by economists in the industrialized west, they are not a cure all, and these institutions must take into consideration the various factors that make each country distinct when pushing reform. I believe that the West’s uncompromising policies, when it comes to how to spur economic growth, are what led to disdain for the Bretton Woods Institutions in developing countries and has led to them turning to China more and more for trade and aid.

Libby C

I enjoyed reading Rodrik's discussion of growth theory. I particularly enjoyed the concept that neoclassical economic principles need not be discredited when considering growth in developing countries, but rather interpreted and applied to particular cases and institutions. The presentation of the paper, briefly citing the historical growth scenarios of different countries, provided support for Rodrik's claim that orthodox and unorthodox methods can be combined to achieve growth.

The most important concept that I took away from this paper was the need for local knowledge when developing sets of policies to spur growth. Rodrick states "Successful reforms are those that package sound economic principles around local capabilities, constraints and opportunities." Recommendations from economic models can not be applied strictly without consideration of local environments and characteristics of institutions. Policy makers should apply economic principles in context to create a lasting approach to growth that works for their society and economy.

Hampton Ike

Rodrick begins his paper stating that it revolves around two key arguments, "One is that neoclassical economic analysis is a lot more flexible than its practitioners in the policy domain have generally given it credit... The second argument is that igniting economic growth and sustaining it are somewhat different enterprises". The arguments presented seem to be very similar to the ideas we have been discussing in class insofar as traditional growth policies do not always work, the inertia associated with growth is not as strong as previously thought, and there is no uniform growth plan that can apply across countries. Rodrick discusses the way varying growth models have come in and out of intellectual dominance, but that more recently the "Washington Consensus" has taken the top spot. However, even that broad theory, which outlines underlying economic principles of property rights, more open markets, sound money, etc. failed to produce in Argentina. Rodrick's paper is not meant to be a sweeping thesis that changes growth economics, but rather it seems to me more a caution to the field that individual countries are immensely diverse even if they seem similar, and that a one size fits all growth model will not succeed.

Mac Keers

Rodrik’s article is a great explanation of why cookie-cutter policy should be avoided. Despite the theory behind the Washington consensus goals being sound, there is no one solution or prescription for economic growth. In order to properly grow an economy you need to be intimately familiar with all factors that influence it. This is especially important since the Washington consensus requires opening the country to international trade. This makes the situation infinitely more complicated and ignoring the many possible outcomes is likely to lead to failure. We discussed an example of this oversight in class with regards to savings flowing out of countries. A lack of understanding about where money flows to when it’s saved and why this might occur is a strong possibility for why so many countries have struggled following the Washington prescription.
Although the standard approach may be faulty, we should also be wary of anomalies. Things that worked for China may not work for other countries especially considering how unique its situation is in terms of resources, location, population, etc. The twitch response is to simply implement these ideas everywhere but the variation among the many successful growth stories is more than enough reason to believe that there is no one right answer.

Nathan Kelly

I think this paper has some strong relation to Atul Kholi's work on state directed development. His book talks about the importance of having government and private enterprise yoked together to be able to reach a country's development goals. I think in our class we can think about this as how we make the assumptions in our model fit. A lot has been said a bout Latin America in this piece and the comments above and while I agree that what works in other parts of the world may not work in Latin America, we can think about times in Latin America's history that we have seen stable growth by making the assumptions fit. I think of Chile in the late 80's and government intervention to stabilize the economy against copper shocks and how it led to steady growth in the 90's. I think examples like this serve as reminders that models that have been tried before that are supported by the state can still work in the context of Latin America.

Jenny Rea Bulley

Rodrik made many interesting points about trying to apply "cookie-cutter" (thanks Mac) policy to spur development. It is often easy for us, Westerners, to assume economic development follows democracy and market-driven free economies. However, Roderik pointed out that as long as we follow neo-classical models within context, development will follow. That is not to say that every policy will work in every country. The key is to evaluate and analyze within context. He uses many case studies to illustrate his argument. He uses China contrasted with India contrasted with Korea contrasted with Latin American countries to show that you cannot simply take a strategy that worked for someplace else, apply it, and hope for the same results when your political and social makeup are vastly different.

Roderik also discusses sustainable development versus development spurts. This hits on what we discussed on Tuesday in class. It is easier to move along the production function by adding labor or adding capital, but that kind of development will not last as the returns to investment continue to shrink. Policy should aim at rotating the production function up, increasing national capacity to develop. However, again, this is not a cookie-cutter recommendation as different countries should approach this differently depending on where they currently reside in the model.

Overall, this paper argues that classical economics should not be forgotten in policy decisions, but it should not be used naively and willy-nilly. Let knowledge of classical economics inform policy decisions given national conditions, culture, economies, and politics.

Minh Ton

In this paper, Dani Rodrik critiques the Washington Consensus by pointing out the poor performances of several Latin American countries as compared to East Asian countries. China, Korea, and other Southeast Asian countries have relatively enjoyed a high and sustained economic growth while the Latin American countries, following the same basic procedures, did not achieve anywhere substantial success. Although the author agrees that property rights, market oriented incentives, and macroeconomic stability are necessary for economic growth, he points out that different institutional structures, especially those specific to their socioeconomic and political context, play a big part in obstructing it. Argentina is the greatest example of how important it is for policymakers to look at the fundamental differences among countries while proposing and implementing economic policies to achieve long-term growth.

Aaron DiGregorio

Rodrik’s paper argues that while policies cannot be used universally for differing economies, they can be used as inferences in the hopes that we can learn from previous examples for similar situations. He goes on to state that the belief that an effective policy for one economy should be duplicated in order to guarantee success in another economy is a huge misconception. This is because of a failure to understand the, as he put it, “unconventional elements lead to growth” (i.e. people, area, culture, etc.)

When looking at the models from Tuesday’s class, it is easy to see how some policy makers can be misconstrued and led to believe that Solow’s Growth Model is a universal truth for all economies, and thus should be solely used to predict economic growth. Solow designed his model to talk about an isolated area of economic growth, not to be the sole influencer of policy. As I mentioned earlier, this does not allow policy makers to see the entire picture, thus inevitably leading them to failure.

D

I think it is very natural to hope for a single solution to economic development. A policy recipe that is transferable from country to country would be ideal but, as Rodrik argues, unrealistic. Rodrik does well to contrast development in China, South Korea, Latin America etc. to show the heterogeneity in successful developmental policy. It is interesting to consider the political implications of such an argument. I believe our politicians have the tendency to simplify their stance on issues (ie. you believe in the free market or you don't). As Rodrik points out the policy solutions are often more nuanced. The rapid development of China's economy is an obvious example Rodrik mentions again and again. Yet, we demand our policy makers to make a firm and often simplified stance when it comes to policy. The "Washington Consensus" is an example of the search for this concreteness and simplicity. Instead, I would think we could examine the effectiveness of policy on a case by case basis setting aside ideology. In this way we could objectively determine the direction of our policy.

Rodrik makes a strong argument for examining developmental policy on a case by case basis. I think this is extremely reasonable and should be applicable to other policy considerations as well.

(James Lewis)

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