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Saturday, December 01, 2007

Book Review: One Economics, Many Recipes

To be honest, I do not feel qualified to review One Economics, Many Recipes. It's written by Harvard Economist and blogger Dani Rodrik as a technical manuscript on globalization and economic growth --- apparently it was a collection of papers that have already been published, but properly organized into a theme with a logical progression.

Rodrik addresses many questions in this book:
  • Is there anything in common between the successful developing countries of the past 30 years?
  • Is the Washington Consensus legitimately useful for developing countries to follow?
  • Why was China's drive into a market/capitalistic economy successful, while Russia's was a disaster?
  • Can Economists provide meaningful prescriptions for developing countries?
These are very important questions, as the last decades have found the Asian economies growing by such large amounts that millions were lifted out of poverty, while African and Latin American countries seem to fall further and further behind.

The book begins with a bang, first demolishing the free-market ideology so often propounded by the proponents of the Washington consensus:
When Taiwan and South Korea decided to reform their trade regimes to reduce antiexport bias, they did so not via import liberalization (which would have been a Western economist's advice) but through selective subsidization of exports. When Singapore decided to make itself more attractive to foreign investment, it did so not by reducing state intervention but by greatly expanding public investment in the economy and through generous tax incentives.

This is important, because many market ideologues (The Economist being but one) frequently posit that the Asian economies grew not because of their industrial policies but despite them. Rodrik does a great job countering all those arguments, the best of which is a chart showing that the countries that did everything that the Washington Consensus prescribed did much worse at growing their economies than countries that attacked growth from a systematic fashion.

Rodrik then begins to provide tools for economists to analyze developing countries. The most important prescription would seem to be obvious: it is most important to remove immediate constraints to growth. For instance, Brazil and El Salvador took wholesale reforms of their economies, yet grew more slowly than the US because Brazil was savings-starved while El Salvador's problem was low returns to capital. Yet the Washington consensus prescribed the same treatment for both economies, neither of which responded.

By contrast, China's major constraint in 1978 was the lack of market incentives in agriculture. The naive Washington consensus view would have been for China to switch wholesale to the capitalistic system with land ownership. But Russia showed that that route is fraught with danger --- government insiders or powerful outside interests could easily outbid ordinary farmers and citizens, thus resulting in an unequal society that would demoralize and discredit the market based system. Instead, what China did was far more clever: they grafted a market system on top of the existing state-ordered system, allowing households who produced surplus goods to sell into the free market. This granted market-type incentives without disrupting the existing system, while slowly easing the entire country into markets.

The book is full of such examples that are both convincing and properly cited and researched. There are quite a number of equations and other mathematical constructs as well, so those who wish to dig deep in can do so. Rodrik does not pretend that the fast growing Asian economies are free of problems --- he acknowledges, for instance, that many such countries will eventually run into the constraints of their economic infrastructure and will hit a brick wall for growth if they do not keep their institutions and economic structures improving at the same pace as their economies. However, for most developing countries the first order problem of getting that growth in the first place is by far the harder problem, and Rodrik provides the tools for analyzing them, even if in many cases, it appears that the creativity involved in designing alternative institutions to the obvious free market approach has to be done by someone really much smarter and with more stake in the outcome than the average Western economist.

The second part of the book analyzes various industrial policies and institutions required for growth. One of the most important points Rodrik raises is that in many developing countries, entrepreneurship has positive externalities that are not captured by first movers. This justifies strategic government intervention in encouraging such entrepreneurship, and he provides examples as to how to do so. He does admit that government corruption and the natural incentives of a government can lead to an inability to sunset those incentives and benefits to failing businesses, but he points out that the Asian countries have successfully done industrial policies for the last 30 years, and that the ability to acquire such expertise is not restricted to Asia.

The last part of the book extends these concepts to the entire global economy, not just developing nations. What kinds of trade regimes are acceptable? Rodrik feels that the existing trade structures do not allow for national institutions or standards to stick, thereby eroding the global trade system's legitimacy. In particular, Rodrik advocates that nondemocratic countries should not be able to count on the same trade privileges as democratic ones:
Think of labor and environmental standards, for example. Poor countries argue that they cannot afford to have the same stringent standards in these areas as the advanced countries... Democratic countries such as India and Brazil can legitimately argue that their practices are consistent with the wishes of their own citizens, and that therefore it is inappropriate for labor groups or NGOs in advacned countries to tell them what standard they should have... But non-democratic countries such as China, do not pass the same prima facie test. The assertion that labor rights and the environment are trampled for the benefit of commercial advantage cannot be as easily dismissed in those countries. Consequently, exports of nondemocratic countries deserve greater scrutiny when they entail costly dislocations or adverse distributional consequences in importing questions.

In other words, the way we've conducted trade has not been fair to either the poorest of our citizens nor to the citizens of undemocratic countries that may have gotten screwed because of the almighty dollar.

I hope this review has given you an idea of what an impressively good book this is. I could probably read this book 3 times over and get even more ideas and impressively researched examples, but to do so would be to rob you of the pleasure of reading this book for yourself to get an understanding of what a really good Economist thinks about, and how the libertarians and free market-ideologues really don't have any real answers for the developing world. I paid price for this book because I couldn't find it in the local library, and it is worth every penny.

Highly recommended.

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