Shleifer the (counter-)revolutionary

Whenever I see Andrei Shleifer, he asks me how the revolution is going. He has in mind of course the kind of views I espouse in this blog, which he considers heretical.

But Andrei is promoting his own counter-revolution, one that enshrines the last quarter century as the age of Milton Friedman. In a recent short paper, he attributes the rapid growth of China, India, and a few others to the turn to markets and the victory of Friedmanite views on economic policy.

The last quarter century has witnessed remarkable progress of mankind. The world’s per capita inflation-adjusted income rose from $5400 in 1980 to $8500 in 2005. Schooling and life expectancy grew rapidly, while infant mortality and poverty fell just as fast. Compared to 1980, many more countries in the world are democratic today.

The last quarter century also saw wide acceptance of free market policies in both rich and poor countries: from private ownership, to free trade, to responsible budgets, to lower taxes. Three important events mark the beginning of this period. In 1979, Deng Xiao Ping started market reforms in China, which over the quarter century lifted hundreds of millions of people out of poverty. In the same year, Margaret Thatcher was elected Prime Minister in Britain, and initiated her radical reforms and a long period of growth. A year later, Ronald Reagan was elected President of the United States, and also embraced free market policies. All three of these leaders professed inspiration from the work of Milton Friedman. It is natural, then, to refer to the last quarter century as the Age of Milton Friedman.

Shleifer's article is purported to be a review of two books with different takes on this period, one by Stanley Fischer and collaborators and another one by Joe Stiglitz and collaborators. No prize for guessing which one Andrei likes and which he trashes.

I have always found this view--attributing the successes of the last quarter century simply to market-oriented policies--as more obfuscating than clarifying. For one thing, countries like China and India have so many blemishes on their record that if you treat them as poster children for economic liberalism you run very quickly into trouble.  Had these countries been basket cases instead, the Friedmanite perspective would offer as good an explanation of their failure: look at the corruption, the pervasiveness of state controls, the extent of public ownership!

Secondly, the countries that did a real turn towards markets, chiefly those in Latin America, have been rewarded not by China-like growth, but dismal outcomes. Shleifer recognizes this.  His explanation: overbearing taxation and regulation!  With this kind of parsing of the evidence ex post, there is no way we can ever be wrong...

For a good antidote, turn to Berkeley economist Pranab Bardhan's demolition of China and India myths in the Boston Review.       

Comments

[Minivet]

Wow, as if China and India didn't have a host of constricting regulations of their own even now...

[Chandan]

I attended a discussion forum last week at the Independent Institute. What strikes me about Shleifer and the panel at the forum is that both attribute the rise of China and India to free market and the declining role of government.
They launched a book titled "Making Poor Nations Rich"...this book reeks of the unconvincing, banal views argued by Shleifer! Check this out: http://chandansapkota.blogspot.com/2008/02/how-to-make-poor-countries-rich.html
Interesting stuff: one audience asked the editor of the book, who attributed the rise of Celtic tiger and decline in poverty to free markets and very small government, what is the difference between his approach and the Washington Consensus? To my surprise, he did not know what Washington Consensus was (though he kept on saying "getting institutions right" for markets for the entire duration of the talk) and said, "I think it always keeps on changing. I will pass it to the other panel!"

[Matt]

You should ask Shleifer if it helps or hurts a country to have advisers who engage in massive insider trading, fraud, and embesslement. He certainly knows a few things about those topics!

[paine]

Pranab has the key link firmly in hand
as we
old school diamat types put it

the solid base in rural china
a two fold legacy
part deng part mao

deng's shrewd lot use reform
village caucus household division system

and bizzare as clio can get
in her opportunism
the earlier maoist
commune movement's
rural self sufficiency decentralization structure

the two powered
prosperity and local initiative in the first five years of reform

with the vestigal commune
system
as human mobilizer
and trad-tech
thousand hand
craft brigades
everywhere ready to "make marketable stuff "....

btw
i'm impressed
in many ways
by the independence
of this view

for a sub-continental
to be so generous to
the carthage to his rome
is a tribute in itself
to his clear and wide open head

to see both the ups
and downs of
plans(policies)
and markets....
the checkerboard
of casual patterns
in actual social development ....
well just makes me think
clio herself sort of
agrees with deng's infamous line
about opposite cats

red or white cats
both at the right time
and in the right place
(and often in odd
unexpected re-combination)
can catch progress

but here's the proviso

they both also
from time to time
especially in dogmatic
isolation from each other
don't catch progress one damn bit

[paine]

Pranab has the key link firmly in hand
as we
old school diamat types put it

the solid base in rural china
a two fold legacy
part deng part mao

deng's shrewd lot use reform
village caucus household division system

and bizzare as clio can get
in her opportunism
the earlier maoist
commune movement's
rural self sufficiency decentralization structure

the two powered
prosperity and local initiative in the first five years of reform

with the vestigal commune
system
as human mobilizer
and trad-tech
thousand hand
craft brigades
everywhere ready to "make marketable stuff "....

btw
i'm impressed
in many ways
by the independence
of this view

for a sub-continental
to be so generous to
the carthage to his rome
is a tribute in itself
to his clear and wide open head

to see both the ups
and downs of
plans(policies)
and markets....
the checkerboard
of casual patterns
in actual social development ....
well just makes me think
clio herself sort of
agrees with deng's infamous line
about opposite cats

red or white cats
both at the right time
and in the right place
(and often in odd
unexpected re-combination)
can catch progress

but here's the proviso

they both also
from time to time
especially in dogmatic
isolation from each other
don't catch progress one damn bit

[paine]

bravo matt

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[Spiff]

Regarding Pranab's Article-
One of the issues that keep cropping up is- The failure of Human Development Indices improvement is taken as a sign of non success of reforms. While Pranab himself agrees that- Reforms in Indian economy have been restricted to a few sectors and undeniably those are the few sectors that have shown the best results. So while India may have all the problems - Further reforms have been the best antidote found till date and thatsa where i think, Shleifer's contention of friedmanic factos working is credible.

[Felipe Araújo]

I thought about it for a few days, and I finally discovered: you look like Michael Douglas.

[calmo]

Not only am I amused by the ideological character of this:
"I have always found this view--attributing the successes of the last quarter century simply to market-oriented policies--as more obfuscating than clarifying."
but nearly sink in the thought that the ideological recognition that DR provides only adds fuel to that fire...as if there is little point in condemning Shleifer who has no ears for other ideologies.
Like a duel with no pistols, no swords, no switches, no pencils...so we must type our brains out.
"How's the revolution going?" We could ask Shleifer in a few quarters --just a check on the formation of embryonic ears from that boy.

[Thorstein Veblen]

I'd say the counter-revolution is going better than the revolution...

Shleifer is what, the most published economist of all time? It's worth pausing a moment to consider that, Shleifer, despite holding views which any thinking person can recognize as nonsensical, can nevertheless become the top published economist at the most prestigious (and supposedly liberal) academic institution in the world. (I don't blame him for the oil investments, or the other shenanigans when he was advising the former Soviet gov't, after all, he was just using the Harvard brand and the US Gov't to try an' make a lil' dough on the side. His first-hand corruption experiences then allowed him to write a paper about it: Politicians and Firms). What I think is the real travesty is that his training in economics did not prepare him at all to advise the gov't, a task for which he & Sachs were just in over their heads... And Shleifer is no outlier. Every other paper I read is on the same wavelength... Our profession is broken. Shleifer is clear evidence.

[Alanna]

Bravo Paine.

[Justin Rietz]

"Secondly, the countries that did a real turn towards markets, chiefly those in Latin America, have been rewarded not by China-like growth, but dismal outcomes. Shleifer recognizes this. His explanation: overbearing taxation and regulation! With this kind of parsing of the evidence ex post, there is no way we can ever be wrong..."

How much of a "real turn towards markets" did these countries make if they still have overbearing taxation and regulation? Perhaps I am misinterpreting Shleifer's comments, but he seems to be saying that while many countries over the past several decades undertook reform to move towards free markets, some were successful and some were not. Those that were not successful may have failed due to an inability to reduce levels of taxation or remove onerous regulations, both more or less requirements to be considered a free market.

[xfire13]

Shleifer might have been doing this research from a jail cell ,where he belongs for the insider trading, if not for the intervention of Summers et al.

[Barkley Rosser]

Oh no. According to Glaeser and Shleifer in one of the most cited papers of the last few years, the problem with Latin America is that it has the Napoleonic code in place rather than common law. East Asia, on the other hand, supposedly has the Germanic code, which is also ultimately a civil code like the Napoleonic code. Unfortunately there are some very bad problems with this argument, such as the fact that only a few Latin American countries have the Napoleonic code, while many have the old Spanish code of the wise Alfonso X from 1254, which in turn is based on the Germanic/Visigothic code of Euric from 480, which would make it more like the codes in East Asia. But then, Glaeser and Shleifer do not seem to care too much about such niceties of historical or legal accuracy.