Dani Rodrik's weblog

More on Turkish politics

My latest on Turkey's ugly turn is here.  The title is over-the-top, but it was the WSJ editorialists' choice, not mine. 

(And they got the caption underneath the picture on the online version badly wrong, as of this writing.)

Some fallacies never die

My previous post on the comparative merits of import substitution (ISI) and the Washington Consensus (WC) has resuscitated some counter-arguments that I thought had long been laid to rest.  Three in particular:

1.  “ISI was responsible for the debt crisis of the 1980s.”  This confuses micro and macroeconomics.  The debt crisis was the result of a macroeconomic imbalance: an excess of aggregate spending over aggregate incomes.  The relative price “distortions” that were the hallmark of ISI do not necessarily produce macroeconomic imbalances (cf. India throughout the heyday of its ISI regime); nor do macroeconomic imbalances require relative price distortions (cf. Greece today).

2.  “Latin American countries did not try hard enough to implement WC policies in the 1990s.”  This is probably the most disingenuous comment of all.  It does great injustice to the efforts of Latin American policy makers, who led a real revolution in policy making.  It is also disturbingly reminiscent of the old chestnut about “communism didn’t fail because it was never tried.”

3.  “The check is in the mail.”  In other words, just give it more time and we will see the positive results of the WC eventually. The obvious riposte to this is to point to the experience of Asian countries that seem to get quick results from unorthodox but well-targeted reforms.  Isn’t it obvious that this experience should be a better guide to growth-promoting policies than the WC?   

I have written about all these things in various places.  See here and here.  

The most telling chart I have seen in a long time

The Inter-American Development Bank’s new study, The Age of Productivity is a trove of neat information on productivity performance in Latin America.  My favorite nugget is this one:

Ignore the intermediate period of debt crisis (1975-90) and focus on the differences between the periods of import-substitution (IS, 1950-1975) and Washington Consensus (WC, 1990-2005).  What do we see?

1. Labor productivity under IS grew at a rate that is double the rate under WC.
2. The rate of labor productivity growth within sectors (the component identified as “within” in the chart) was comparable under the two policy regimes.
3. The worse overall performance under WC is accounted entirely by the fact that there was much less desirable structural change -- labor moving from low to high-productivity activities -- under WC than under IS.

We already knew 1, and I have long suspected points 2 and 3 to be true as well.  But I had never seen the facts laid out so clearly.

Here is what seems to have happened:

For all its faults, IS promoted rapid structural change.  Labor moved from agriculture to industry, and within industry from lower-productivity activities to higher-productivity ones.  So much for the inherent inefficiency of IS policies!

Under WC, firms and industries were able to accomplish a comparable rate of productivity growth, but they did so by shedding (rather than hiring) labor.  The displaced labor went not to higher-productivity activities, but to less productive lines of work such as informality and various services.  In other words, the WC ended up promoting the wrong kind of structural change.

This account reinforces the centrality of structural change in driving rapid economic growth. It should also cause us to be wary of productivity studies that focus on what is happening within manufacturing alone.  After all, productivity within manufacturing can be stellar, but if manufacturing or other high productivity sectors as a whole are rapidly shedding labor, economy-wide productivity performance will be disappointing. 

Arthur Lewis lives.

Europe’s fate depends on…

Germany.

Financial meltdown has been averted in Europe – for now. But the future of the European Union and the fate of the eurozone still hang in the balance. If Europe doesn’t find a way to reactivate the continent’s economy soon, it will be doomed to years of gloom and endless mutual recrimination about “who sabotaged the European project.”

European growth is constrained by debt problems and continued concerns about the solvency of Greece and other highly indebted EU members. As the private sector deleverages and attempts to rebuild its balance sheets, consumption and investment demand have collapsed, bringing output down with them. European leaders have so far offered no solution to the growth conundrum other than belt tightening.

The reasoning seems to be that growth requires market confidence, which in turn requires fiscal retrenchment. As Angela Merkel puts it, “growth can’t come at the price of high state budget deficits.” 

But trying to redress budget deficits in the midst of a collapse in domestic demand makes problems worse, not better. A shrinking economy makes private and public debt look less sustainable, which does nothing for market confidence.

So Europe needs a short-term growth strategy to supplement its financial-support package and its plans for fiscal consolidation. The greatest obstacle to implementing such a strategy is the EU’s largest economy and its putative leader: Germany.

If Germany wants the rest of Europe to swallow the bitter pill of fiscal retrenchment, it will eventually have to recognize the implicit quid pro quo. It must pledge to boost domestic expenditures, reduce its external surplus, and accept an increase in the ECB’s inflation target. The sooner Germany fulfills its side of the bargain, the better it will be for everyone.

Read the full article here.