Dani Rodrik's weblog

Globalization anxiety as mass hysteria?

Those who are puzzled by globalization anxiety and attribute it to collective irrationality (see Tyler Cowen's piece in the NYT) overlook a fundamental aspect of markets--their "embeddedness."  What I am referring to is the idea that successful markets need to be embedded in a larger set of man-made rules and governance structures.  Markets need regulation, stabilization, and legitimation because they are not self-regulating, self-stabilizing, or self-legitimizing. The success of modern capitalism is due as much to the institutions that govern markets--political democracy above all--as it is to the power of markets themselves. 

It is important to understand this because it provides an important clue as to why domestic and international trade are different.  Domestic trade takes place within thoroughly embedded markets; there are clear rules and they apply to all transactions equally. International trade, on the other hand, is conducted in only weakly embedded markets: the rules either do not exist or apply unevenly.  I believe this is the fundamental reason why their consequences are often perceived so differently.

Let me make this concrete. If Harvard fires me and hires Tyler Cowen instead, I would feel bad for sure. But I would not blame Tyler or Harvard, because I would assume that the decision was made on fair grounds: we compete under the same ground rules, and if Tyler beat me to it, it must be because he deserves it. 

But suppose instead that Harvard hires John Plagiarizer, who has a much longer vita and larger citation counts than either one of us, because... well because he is a flagrant plagiarizer. I think I would have pretty good reason to feel cheated.

An extreme example? Let me make it less so.  Suppose that I am an experimental psychologist instead of an economist and the person Harvard hires in my place is someone who has accumulated a long vita by virtue of not having to abide by human subjects review standards. (You can find out a lot about human behavior through torture.)  Would I not feel treated unfairly? You bet I would.   

The international trade counterpart of this hypothetical is the worker who loses his job because his company decides to move to a country where, say, labor rights are routinely violated. So the "us" and "them" characterization that Tyler attributes to irrational nativism perhaps has more to do with the absence of a common set of international rules on labor standards, environment, consumer safety, and so on. 

By overlooking the problems created by trade in instances where regulatory arbitrage does play an important role, we miss the opportunity to celebrate the kind of globalization where such arbitrage doesn't play a role.  The latter type of trade probably constitutes the bulk of world trade. But because economists do not make this important distinction, they have no language or ability with which they can respond appropriately to the uneasiness out there--except for calling it irrational. 

And by the way, Harvard cannot fire me because I have tenure (as does Tyler). Which makes any pontification on our part about job anxiety a very poor guide to reality. 

UPDATE: Tyler Cowen responds, but frankly I am not quite sure I follow it, as it seems to have been written in haste.  He concludes thus:

The bottom line is that most people support their countries to a highly irrational degree in most international questions or disputes.  That's just obvious -- watch the World Cup -- and yes Jonathan Swift understood that too.

I have no trouble with this, except that I did not think this was what the argument was about. I thought Tyler was trying to explain why opposition to globalization had increased and become more salient in recent years and why many intellectuals were going soft in their role as cheerleaders for globalization.  I don't think a constant (nativism) can explain a change. I do think an important part of the explanation is that regulatory arbitrage has become a much bigger issue now.

And by the way, some readers may want to be informed by real research as to what drives protectionist sentiment around the world. Here is where you can start (Non-gated version here).

Thoughts on graduation and the MPAID program

This is graduation week at Harvard, which means all the lawns are perfectly manicured, buildings are carefully scrubbed, and Harvard Square is teeming with former graduates in town for reunions. And of course it means it is raining...

As MPAID faculty chair, I make a short speech to the families of MPAID graduates.  Here is an excerpt:

A decade ago, Harvard and the Kennedy School took a big gamble by launching a new degree program, called the MPA in International Development. The gamble was that if we put together a really rigorous and challenging program in international development--a program with no equal anywhere else--we would be able to attract 65 or so students we would be proud to have in our midst and as our graduates.

We set very ambitious goals for the program. Our aim was no less than a new career path in development. We emphasized both high-level technical training (which is typically the province of Ph.D. programs in economics) and professional, multidisciplinary training (which is the province of master's programs in international affairs or public administration).

We wanted the MPAIDs to combine both types of strengths—to have “hard minds and soft hearts.” Hard minds because development is too important a profession to leave to fuzzy thinking, and soft hearts because development is impossible to achieve without empathy for the people whose lives we are trying to improve.

We wanted to train professionals who were skeptics, but not cynics: that is, always questioning the conventional wisdom, but without the defeatist attitude that says nothing works and public action cannot achieve public ends.

One of my favorite stories is one that I first heard from E.F. Schumacher, whom some of you may know as the author of “Small is beautiful.” It concerns an economist, an architect, and a physician who are traveling together in a train. They fall into a conversation about which one of the three professions is the oldest and therefore the most honorable. The physician says, well of course medicine is the oldest profession. Look, at the very beginning God made Eve out of Adam's rib. This was an act of surgery, was it not? The architect says, hold on, before there was Adam and Eve, the earth and the planets had to be constructed. God made the earth out of chaos. This was an act of architecture. The economist turns to the other two and says: "And where do you think chaos came from?"

Well, we wanted to train professionals who could not only imagine what a better world might look like, but would also help create it—though better institutions, better programs, better policies.

For us, this gamble has paid off handsomely. We could not have hoped for graduates that better embody the ideals of the program--academic excellence, commitment to development, leadership.

In my case, the festivities are attenuated somewhat by the fact that these ceremonies also mark the completion of my duties as MPAID faculty chair.  On Thursday, I hand out diplomas. On Friday, I am a free man!

As any reader of this blog knows, I have nothing but good things to say about the MPAID program and, more importantly, about the students in the program.  But times of transition are also times for stock-taking, so I have been thinking about where we have been falling short and how we can improve the program even more.

So here is where I wish we could have done better...  [the next three paragraphs accidentally deleted]

As for the future, the MPAID program will be in very good hands, so I am not losing any sleep over it.

Wolf on Spence (and Easterly)

I agree with Martin Wolf's take on the Spence commission report on growth, and his put-down of Bill Easterly's column:

Contrary to what Prof Easterly argues, the report makes useful contributions to policymakers’ understanding. The most important is the emphasis on growth itself, underplayed by many advisers and activists in the 1990s and early 2000s. Growth is not everything. But it is the foundation for everything. The poorer the country the more important growth becomes, partly because it is impossible to redistribute nothing and partly because higher incomes make a huge difference to the welfare of the poorest.

Yet the report goes beyond that. It is based on an analysis of 13 countries that have managed growth of 7 per cent a year over at least 25 years. They are diverse: Botswana, Brazil, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Malta, Oman, Singapore, Taiwan and Thailand. India and Vietnam seem likely to join this group. These countries have not all sustained their growth: Brazil and Indonesia are important examples of backsliding. These countries are also different in many respects, notably in their size, resources and culture.

Yet, suggests the report, they shared five points of resemblance: they fully exploited the opportunities afforded by the world economy; they maintained macroeconomic stability; they sustained high rates of saving and investment; they let markets allocate resources; and they had committed, credible and capable governments.

These points are consistent with the so-called “Washington consensus” of the 1990s, which emphasised macroeconomic stability, trade and the market. Yet the report’s emphasis is different: it does not stress privatisation, free markets and free trade, while it does emphasise the role of the so-called “developmental state”.

I think Martin was ill-served by the  FT editor who chose his title.  His column bears the heading "Useful do's and don’ts for an economy set on fast growth," whereas a key point of the Spence report--with which Martin seems to agree--is that while we can agree on the key ingredients of growth, the way to achieve these varies greatly from setting to setting. 

As for Bill Easterly, I'm afraid Dingel put it best: "If you're overconfident about development, Bill Easterly pokes holes in your arguments. And if you're modest, he makes fun of you." 

(How) is Africa learning from its mistakes?

There is a useful symposium on Africa at the Boston Review revolving around Ted Miguel's essay, including contributions by Bob Bates, Paul Collier, and David Weil. The questions are: what is driving Africa's recent growth, and how sustainable is it?  Is growth the result of good policies, democratic governance, Chinese investment, or high commodity prices?  And is it a blip, or something more permanent?

Collier offers the simplest answer of all: African policy makers have been learning from their mistakes.

But the growth we are seeing today is not just a result of commodity booms. I don’t think that is the key to Kenya’s pre-election economic success. There is a process at work that does not depend on democracy and is so simple that analysts generally miss it: learning from mistakes. Since 1970 African societies have accumulated a huge stock of experience in how not to manage an economy. For example, from the mid-1970s until the mid-1980s Tanzania adopted regulatory policies that proved to be ruinous. The knowledge they gained through failure is valuable. Tanzania is now one of the best-managed of all Africa’s economies. The European society with the best record of containing inflation over the past sixty years is Germany. It has the best record because it used to have the worst: the experience of hyperinflation immunized Germans from macroeconomic folly.

Miguel endorses this view, but spins it differently, focusing on the advantaged of randomized impact evaluations.    

While it’s natural to focus on such success stories, randomized evaluations don’t always produce positive results about program impacts. But information on failures is just as useful; it allows policymakers to shift funding from the projects that don’t work toward those that do. This is at the heart of the learning agenda that ... is the key to Africa’s economic future. Democracies like those emerging in Africa are particularly good learning environments, settings where impact evaluations can be carried out, their fruits widely distributed, and governments held accountable for applying their lessons to policy. In nations with weaker governance, rigorous program evaluations can themselves serve as a form of political accountability, empowering decent government officials to push for reform.

With impact-evaluation results in hand, policymakers in poor countries will increasingly be able to rely on hard evidence when deciding how to use their scarce resources. We now know the benefits of anti-parasitic drugs in improving school attendance in Busia, and as a result the Kenyan national government has included mass school-based deworming in its official school health plan for the country. Word has spread, and other African countries have expanded their own school deworming plans. In Ghana, over four million children received anti-parasitic drugs at school in 2007.

Learning about deworming is a small step forward on its own. But it will be through many such small lessons—in areas as diverse as health, education, agriculture, governance, and foreign aid—that African countries might learn to sustain and possibly augment their recent economic growth, even after the inevitable fall in global commodity prices.

I think Collier would say that the learning that comes from having followed disastrous macro, trade, and financial policies is much more important than any learning from randomized evaluations--even though the former hardly qualifies as "hard evidence" in the sense that Miguel uses the term. 

I would add that randomized impact evaluations rarely generate usable "hard evidence" for policy makers. As soon as we generalize, scale up, or extrapolate we are in the business of transforming hard evidence into soft evidence.  I wish Miguel were right when he writes: "With impact-evaluation results in hand, policymakers in poor countries will increasingly be able to rely on hard evidence when deciding how to use their scarce resources." Alas, we are doomed to live in a world of soft evidence.  And pretending otherwise may itself end up skewing where resources go.

Where I am not at today

I was supposed to be at this conference, delivering this paper.  Alas, a sick child has kept me home, and away from what I was hoping would be a good discussion. It has also saved Bill Easterly--the co-organizer of the conference--an earful on what I think about his latest.  But more on that later.

A book review from down under

"One Economics, Many Recipes is a collection of nine essays by Dani Rodrik that has something to annoy almost everyone," starts Declan Trott's review of my book.

As he explains, following a summary of the main recommendations of the book:

This is a self-confessedly modest program. Yet it contradicts everyone currently making a noise on the subject: assorted protesters such as Joseph Stiglitz and Ha-Joon Chang (because it does not demonise the IMF, World Bank, and WTO); heterodox economists such as Erik Reinert (because it asserts the value of neoclassical theory); neoclassical economists at the IMF, World Bank and WTO (because it advocates industrial policy and deprecates both the old Washington Consensus and the new ‘augmented’ version); Jeffery Sachs and Bono (because it denies the importance of poverty traps and barely mentions foreign aid); and William Easterly and Greg Clark (because it offers, if not a one-size-fits-all solution, at least some concrete advice on how to engineer growth).

I am afraid Trott has got it exactly right.

Changes at REStat

The Review of Economics and Statistics, which I edit along with my colleagues Alberto Abadie, Michael Greenstone, and Julio Rotemberg, is undergoing an editorial transition this summer.  Julio, who has been the managing editor for the last couple of years, is taking a well-deserved rest, and we have two new editors joining the editorial team: Philippe Aghion and Mark Watson.  I am sorry to see Julio go, but thrilled by the new additions.  Philippe and Mark are not only best in the class, but they also extend the Review's reach in two distinct directions--towards applied theory and out of Cambridge, Mass.   

The only bad news is that the burdens of being managing editor have been shifted on to yours truly.

Reflections on the issue of the day

It's the Championship League win for Man Utd  of course.  As pleased as I am with the double that Man Utd have achieved this season (winning both the Premiership and the Championship League titles), there is something deeply unsatisfying about the world's most significant sports event being settled by penalty kicks.   God knows it was exciting; who would have guessed that both Ronaldo and Terry would have missed their kicks or that van der Saar's fantastic block would have saved the day for Man Utd?  But ultimately you'd have to say that it was not the overall quality of play that determined the outcome. Chelsea were the better team in the second half.

And the sight of Terry crying on Avram Grant's shoulder certainly dampened the celebratory mood--at least in my home.

A short-term remedy for unemployment in South Africa

South Africa has been in the news lately, for unpleasant reasons: mob attacks against black migrant workers from neighboring countries.  No doubt the high rate of unemployment among unskilled black South Africans is playing a role in the rising wave of xenophobia.

Unemployment in South Africa is a fundamental problem that requires a multi-pronged approach.  It is driven by unfavorable supply and demand trends in labor markets, downward inflexibility of wages at the very bottom of the labor market, and the increasing unemployability of unskilled young workers who fail to land jobs upon leaving school.  

An employment subsidy targeted at young school leavers can help ameliorate the problem in the short run.  Here is a short op-ed that Jim Levinsohn and I have written which makes the case for it. 

Re-uniting development economics

Development economics is split between macro- and micro-development economists.  The former focus on economic growth and tend to analyze economy-wide policies such as trade, fiscal, and currency policies.  Think Anne Krueger, Jeff Sachs, Bill Easterly, Paul Collier.  The latter focus on individual-level outcomes and analyze microfinance, education, health and other social policies. Think Angus Deaton, Mark Rosenzweig, Michael Kremer, or Esther Duflo. The first group relies on cross-country econometrics or analytical country studies.  The second relies increasingly on randomized field experiments.  Ostensibly, both groups share the same objective: achieving sustainable improvement in standards of living of the poor.  But the way they go about it seems so different as to make them look like members of entirely different disciplines. 

My latest paper argues that there is both good and bad news on this front:

The good news is that there is substantial convergence in the policy mindset exhibited by micro evaluation enthusiasts, on the one hand, and growth diagnosticians, on the other. The emerging “consensus” revolves not around a specific list of policies, but around how one does development policy. In fact, practitioners of this “new” development economics—whether of the “macro” type or “micro” type—tend to be suspicious of claims to ex ante knowledge about what works and what does not work. The answer is neither the Washington Consensus nor any specific set of initiatives in health or education. What is required instead is recognition of the contextual nature of policy solutions. Relative ignorance calls for an approach that is explicitly experimental, and which is carried out using the tools of diagnostics and evaluation. Old dichotomies between states and markets play little role in this worldview and pragmatism reigns. The proof of the pudding is in the eating: if something works, it is worth doing.

This convergence has remained largely hidden from view, because the analytical and empirical tools used by economists at the macro and micro end of things—growth economists versus social policy economists—tend to be quite different. But I will make the case that there is indeed such a convergence, that it is a significant departure from the approaches that dominated thinking about development policy until a decade or so ago, and that it represents a significant advance over the previous generation of research.

The bad news is that there has been an accentuation of the methodological divergence between macro-development economists and micro-development economists, which threatens to overshadow the convergence on policy. In particular, the randomized field trials revolution led by researchers in and around the MIT Poverty Action Lab (Banerjee 2007, Duflo 2006, Duflo, Glennerster, and Kremer 2006) has greatly enriched the micro end of the field, while creating bigger barriers between the two camps. This is not just because randomization is rarely possible with the policies—such as trade, monetary, and fiscal—that macro-development economists study. More importantly, it is because of the raising of the stakes with regard to what counts as “admissible” evidence in development. The “randomistas” (as Deaton [2007] has called them) tend to think that credible evidence can be generated only with randomized field trials (or when nature cooperates by providing the opportunity of a “natural” experiment)....

In fact, the micro experimentalists tend to overstate how much we learn from randomized trials and underestimate how much we learn from other types of evidence.

The question we need to pose of any piece of research is the Bayesian one: does the finding change our priors on the question we are interested in? Randomized evaluations do pretty well when they are targeted closely at the policy change under consideration, but less so when they require considerable extrapolation. In the latter case, evidence from randomized field experiments need not be more informative than other types of evidence which may have less airtight causal identification but are stronger on external validity (because of broader geographical or temporal coverage). In practice internal validity—just like external validity—is not an either-or matter; some studies do better than others on this score than others, and deserve more of our attention on that account. But this preference has to be tempered with a consideration also of external validity. The bottom line is that randomized evaluations do not deserve monopoly rights—or even necessarily pride of place—in moving our priors on most of the important questions in development economics.

But the paper is not meant to be a critique of randomized evaluations, which have greatly enriched our empirical toolkit.  It is instead a plea for not letting prevailing methodological differences overshadow the larger convergence. My purpose is to get macro-development economists and micro-development economists to see that they have much more in common than they realize.

Case in point: the greatest development success of our time, China.  As I review and document in my paper, the experimentalist mind set was deeply ingrained in China’s approach to reform. Some of the experiments that proved extremely successful were: the household responsibility system, dual-track pricing, township-and-village enterprises, and special economic zones.  Of course, the informal evaluations to which these experiments got subjected would not satisfy the standards of the MIT Poverty Action Lab. “Seeing whether something works” is hardly as rigorous as randomized evaluations. But it would be silly to claim that Chinese policy makers did not learn something from their experiments. 

The China example is important because it illustrates, in a vastly significant real-world instance, how the experimental approach to policy reform need not remain limited in scope and can extend into the domain of national policies. China, of course, is a special case in many ways. The point is not that all countries can adopt the specific type of experimentation ... that China has used to such great effect. But the mindset exhibited in China’s reform process is general and transferable—and it differs greatly from the mindset behind the presumptive strategies outlined above. It is perfectly illustrative of the potential convergence between the ideas of micro-development economists and macro-development economists. One would hope that the response of micro experimentalists to China’s experimentalism is not to say “but this is worthless, none of the experiments were evaluated rigorously through randomization,” but to say instead: “great, here is how our ideas can make the world a better place not just one school or health district at a time.”

So my bottom line is that the practice of development economics is at the cusp of a significant opportunity. We have the prospect not only of a re-unification of the field, long divided between macro- and micro-development economists, but also of a progression from presumptive approaches with ready-made universal recipes to diagnostic, contextual approaches based on experimentation and policy innovation. If carried to fruition, this transformation would represent an important advance in how development policy is carried out.

But we need more work. Macro-development economists will have to recognize more explicitly the distinct advantages of the experimental approach and a greater number among them will have to adopt the policy mindset of the randomized evaluation enthusiasts. As the Chinese example illustrates, extending the experimental mindset to the domain of economy-wide reforms is not just possible, it has already been practiced with resounding success in the most important development experience of our generation. Micro-development economists, for their part, will have to recognize that one can learn from diverse types of evidence, and that while randomized evaluations are a tremendously useful addition to the empirical toolkit, the utility of the evidence they yield is restricted by the narrow and limited scope of their application.

In the end, macro-development economists have to be humbler about what they already know, and micro-development economists humbler about what they can learn.