Why I don't do political economy any more

In the early part of my academic career, the question that consumed me was: "why don't governments do what is obviously best for their societies?" Why don't they not reform their policies, when doing so would increase the overall size of the economic pie? Even if they have other goals than maximizing national income, why do they so often choose more inefficient policies (like trade restrictions) over less inefficient ones (such as direct subsidies)?  My Ph.D. dissertation and most of my research in the next 5-7 years focused on trying to answer these kinds of questions.

As I was reading a paper by Raghu Rajan, for which I am the discussant in the annual meetings of the American Economics Association, I realized how much I had moved away from this kind of literature. Raghu's paper is squarely in that "old" political-economy tradition: it asks why countries do not reform and why underdevelopment persists as a result.  His answer is a twist on the traditional story: the problem is not so much a narrow set of elites that want to maintain their rents at the expense of development, but the non-elites who want to maintain theirs.  The educated non-elites do not want competition so they veto greater access to education by the non-educated. Meanwhile the non-educated do not want market reforms because this would raise the prices of many of the services they consume (so says Raghu). The result is reform paralysis. Even though Raghu does not say so explicitly, he is obviously thinking of India.

The reason I stopped writing this kind of papers is that I, along with much of the profession (I think), became a lot less convinced that we had the right fix on what the requisite reforms were.  If you think you know the answer to what every country needs to do, the interesting question becomes why everybody isn't already doing it. But if you don't, you are back struggling with the narrowly economic question of what countries ought to be doing.

In any case, I think the experience of the last quarter century renders the traditional rent-preservation explanation for why reforms are not undertaken difficult to believe. The most successful reforms of the recent past--those in China--were explicitly designed to preserve pre-existing rent streams. If you can get 9% growth while keeping entrenched interests happy, distributive concerns cannot possibly be the problem. And where reformers took on these rents--think of Pinochet's attack on organized labor and protected industries--the economic result was typically a disaster.

So while traditional political economy accounts surely explain some of the pattern of policy making we observe, I don't think they take us far in understanding why some countries grow and others don't. In my book, there are lots of $100 bills left lying on the pavement. The purpose of political entrepreneurs is to pick them up, and that of economists to point out where they are.         

Comments

[David a]

What does Rodrick mean by "..explicitly designed to preserve pre-existing rent streams."?

[Laura Guerra]

"Why I don't do political economy any more"

That is exactly the kind of job that I expect profesors at KSG should be doing (and I think they are).

Especially those with a well founded reputation. (Such as Prof. Rodrik, definetively an "economist idol") Because, I think that they face lower cost than early graduates in making "wild" suggestions.

[robertdfeinman]

Paul Collier has some thoughts on this in his latest book "The Bottom Billion". He lays out a number of factors which seem to determine which states will move out of poverty.

Some typical examples of things holding back progress are being land-locked and having bad neighbors.

I don't know why his book hasn't been getting more notice, both Stiglitz and Easterly spawned a lot of debate when their books were published.

[hari]

Dani -

It's interesting you picked up India and China in suggesting what's may be going right or wrong.

The political economy of mainland China is not only governed from the Centre but the political structure is a monolith - compared to the type of centrifugal and centripetal forces you've in Indian political landscape.

I remember presenting a paper in New Delhi in which I argued, in India, you can literally substantiate any (Ph.D.)hypothesis you wish with regard to the political economy. The evidence is there to be found!

The same is NOT true of mainland China. Principally because of the nature of the political power structure, etc.

[ZKu]

Is the Growth diagnostics a political economics or economics-only framework? When you criticize the laundry list approach to reforms, you refer to the limited "political capital" that can be invested in reforms. Then you argue that focusing on the most binding constraint helps to "clarify the options available to policymakers for responding to political constraints". So what should the policy-maker do when she identifies the most binding constraint, but deems the reform politically impossible? Should she ignore the political constraint and give the reform a try (economics-only consideration)? Or should she reshuffle the top few reform priorities according to political feasibility to make sure there is some bang for the reform buck? If you allow for the latter, then it seems to me that you are still doing political economy.

[OS]

I think you're too quick to dismiss political economy issues. It is true that there are many uncertainties about "what ought to be done", as opposed to "why the obvious isn't being done", but surely it's not an either-or proposition. Both are hugely important.

At least two questions come to mind. First, if political economy issues are secondary, does this mean we can dismiss the importance of (racial) inequality in Latin America, ethnic heterogeneity in sub-Saharan Africa, and the caste system in South Asia when trying to understand their respective growth records? This is not to say these issues explain everything, but surely they matter.

Second, is it not useful to distinguish between public and private goods? I haven't seen Rajan's paper, but maybe he is getting at the political economy issues in public good provision, whereas you're thinking more about private goods.

[Random African]

"does this mean we can dismiss the importance ethnic heterogeneity in sub-Saharan Africa when trying to understand their respective growth records?"

Yes, we can.
Mostly because there is much heterogeneity in the economic (or institutionnal) performances between places that have similar/comparable ethnic balances.
(Botswana and Somalia ? Ghana and Ivory Coast ?)

[inthemachine]

At this point in my career, the question that consumes me is "why do so many people still think there are things that are 'obviously' best for societies?" Kudos to anyone who moves away from this post's opening question!!!

[wjd123]

What type of political economy do economist want to see? One that maximizes efficiency, increased aggregate wealth, and distributes it fairly. That, economist would say, is the political economy that is good for society. But economist can't recommend the best economic path to efficiency and wealth creation without considering its effects on society itself. As Dani says it can merely point to possible gains to be found.

For instance, economist supported NAFTA because they believed that freer trade would increase the wealth of both countries. It did. However it failed miserably in distributing that wealth fairly. Both societies were hurt in many ways. Can economist take no responsibility buy saying "that's not our bailiwick, but the responsibility of government? No, not if they are going to recommend a course of action beyond pointing to the $100 bill on the sidewalk.

For instance the increase in wealth brought about by NAFTA wasn't necessarily good for either society. Poor Mexican farmers were forced off their land when corn prices fell. They ended up coming to North America looking for work. In order to do so they had to cross our border illegally. This in turn has decreased Americans' respect for the law to the extent that the executive branch of government can but won't enforce the law, corporations look for loopholes around it, and Congress does nothing to ensure that the spirit of the law when passed is carried out--seeing that the goals for which the last amnesty was given are met.

Some economist might argue that with freer trade times have changed and what is needed to maximize efficiency today are open borders; that the amnesty bill passed 20 years ago is a vestige of its time holding back progress. What is needed today is a creative way to bring everyone once again under the law reflecting the new requirements of today.

Suppose because of distrust of government no creative solution is found for this political crisis. Suppose this consequent of NAFTA allows those who have the least regard for wealth being distributed fairly to hold on to power. Can economist that pushed free trade be held accountable? They were warned about the possible consequences of open trade with Mexico, yet most chose to emphasize the economic gains of trade over the possible social consequences. Wouldn't government, understanding the possible pitfalls, have acted in the best interests of society by choosing a creative approach over a scientific one.

Don't economist have to make a non-economic judgment about what is good for society before pushing for economic gains. For purposes of theory it is useful to demarcate both spheres, political science and economic science, but for purposes of the political-economy isn't it those creative value judgments in between the count most.

[Barkley Rosser]

wjd123,

Part of the problem with corn prices in Mexico after NAFTA was that the US was allowed to continue subsidizing its corn production and did so, while Mexico was not. Upshot, major collapse of the Mexican maize sector with the resulting massive outmigration of labor.

hari,

I would warn against overstating the degree of centralism in China. Yes, it is more centralized than India, where indeed there may be more systemic variety of economies across the states of India than one finds across the countries of Europe. But there has always been lots of decentralization in China. Free market reforms started in the South and the coastal SEZs, and there have been enormous and increasing regional differences in economic performance, as inequality has soared in China, both regionally, and across groups within regions or cities.

[corvad]

Barkley -- "Part of the problem with corn prices in Mexico after NAFTA was that the US was allowed to continue subsidizing its corn production and did so, while Mexico was not. Upshot, major collapse of the Mexican maize sector with the resulting massive outmigration of labor."

an outcome that has everything to do with the post WWII PL-480 program that led to the institutionalization of agricorporate welfare in the US -- politically powerful lobbying interests had a lot more input into US NAFTA negotiations than small-scale Mexican corn farmers did into the PRI's negotiations on behalf of Mexico.

when states will always represent interest groups instead of their imagined national community (which I'm sure you aren't implying isn't the case), I just can't get behind anything other than a political economy approach to analysis and modelling trade ... Dani's second-best approach seems to me an always-already political economy approach.

[PAC]

Your article is very interesting but I think we still have good reason to believe that large elections leads to but outcome because of a lack of incentives. Therefore, voters have no reason to get informed and to correct their psychological bias. How would you answer to Bryan Caplan's Book "The Myth of a Rational Voter" ?