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August 01, 2007



Using percentage figures is misleading since various countries start from vastly different points.

I can double the sales of lemonade at my kid's stand if they sell two cups today instead of the one sold yesterday, Walmart is lucky if they can grow faster than the rate of population, adding $2 billion per year is much harder.

There is no way to compare growth rates across the world over a 40 year period without taking into account all the many unique factors at play. Using the figures to justify any economic model is just too much of an over-simplification and smacks of ideology, not science.


This is a very interesting idea, at least philosophically. I certainly can't think of any equivalent of a "diversified-portfolio" strategy for developing countries either, but perhaps there are some "broad-strokes" lessons to be learned? Unfortunately the only ones that occur to me off-hand are throw-away suggestions like maintaining macroeconomic stability , enforcing rule of law and investing in education.


You mention that the debt-crisis was not a result of import-substitution in Latin America. Would you mind expanding on that, or citing something explaining why this is so?


You mention that the debt-crisis was not a result of import-substitution in Latin America. Would you mind expanding on that, or citing something explaining why this is so?


This is an interesting way of interpreting the policy question. Taking a cue from MPT I suppose one could find an analogy between a diversified portfolio and an industrial (non) policy which does not attempt to privilege certain industries at the expense of others. Empirically though I would be hard-pressed to give an example of a real-life economy like this. So your point is taken there however I think this is one way of viewing a larger problem.

By making a comparison between stock-picking and industrial policy Summers is implicitly assuming that there is a signigificant degree of uncertainty in forecasting future performance. While I'm not sure the degree of risk is comparable there is some risk that the industrial policy is ineffective or worse. From that point of view, if a country is placing a greater share of it's eggs in the metaphorical basket, what is their cost of being wrong on their policy implementation?

Intuitively, my background (in spite of my economics training) leads me to view the economy as a complex, adaptive system; formulating a industrial policy is an enormously challenging task given the chaotic behaviour of the system.

On balance, I think there is a place for industrial policy and the complexity of the economy need not be a impediment to it. It is rather a constraint which should intuitively guide policy formation and implementation.


great post

in one instance
the diversity larry
is talking about
a portfolio

for south world's

a non sovereign debt portfolio
north firms stocks
and bonds

now add some leverage ....
the former third world
can vault directly
from peon to rentier


diversity under
full open door
instead of a unified emerger gubmint policy
thewildly diverse
rainbow of trans nat corporations
be the deciders
let these world beaters
pick where you win or lose


to be fair
larry is talking about
picking industries to favor

industrial policy
could mean as little
as 19th century us tariffs

or DR's Rx
a managed undervalued currency

no picking winners in either case
what larry prolly objects to

is the autonomy of action
industrial policy can mean
a lift off on your own terms

but then my take on
uncle's containment doctrine

the US can punish any small fry
trying to go it alone

Rich C

Another flaw in the Summers argument, it seems to me, is that the reason (according to the EMH) that stock-picking won't work is that any information that would lead you to favor one stock over another will have already been incorporated into the stock price by the time you make your trade - the incorporation of public information into share prices is extremely quick. However, industrial policy is not typically oriented to taking advantage of information others have not acted on, instead it attempts to learn precisely that which others have already discovered. Brazil's aircraft industry isn't a failure because it was late to the aircraft producing game (behind the US and France, for instance). Instead, the fact that aircraft manufacture had been figure out by others made it easier to learn, and therefore a more efficient way to develop manufacturing capacity than by just hoping that your euntrepenuers manage to discover something completely new.


Getting industrial policy right requires getting the political economy right. Peter Evans' classic book Embedded Autonomy shows that a nation can circumvent "picking losers" if the government facilitators are sufficiently "embedded" into the private sector and therefore sharing knowledge and expertise in such decision making.


Somehow I can't see Park Chung Hee shuffling assets around in a portfolio.

Sometimes the actions of individual leaders are important in initiating and guiding economic change. Their influence cannot be reduced to economic statistics and some important contributions are not what you'd expect, like extracting subsidies from Japan and the US at the right times, like Japan's financing of Pohang Steel.

Good leadership and decisionmaking, human agency, for instance in guiding a corporation or fighting a war, cannot be reduced to statistics.

In evolutionary processes the average does not lead change, exceptional advantageous mutations do.


As far as East Asia goes, ever since Alwyn Young slapped some people around, it's been well known that the growth there has been as much do to higher savings and investment as do to productivity growth. And traditionally Latin America has been a low-saving rate region - Argentina being the best example. So that is not surprising.

But I think the slightly-smarter critique of import substitution/five year plans would go something like this: yes, IS/5YPs can transform a traditional, poor, agricultural economy, industrialize it and make it grow for awhile. But the diminishing returns set in quickly. And the political economy of the process is such that once the industrialization-IS-5yrP growth peters out the economy is just left with a bunch of crappy institutions, a heavy bureaucracy that makes the DMV look like a paragon of efficiency, and a set up that is just asking for financial and exchange rate crisis. So maybe it's not a good idea after all, unless you can pull of an India or a China. Which is a big gamble.


The post misses some key points:

1) Market-oriented policy is closer to a necessary than a sufficient condition for growth. For example, if you have a culture where anyone who makes a profit is pressured to immediately give it all away to an extended family/clan, then that will be a binding constraint on development and growth, regardless of regulatory policy. So lots of places that have that kind of social norm are going to lag in growth whether under laissez-faire, MITI, or communism.

2) The TFP growth figures listed in the post, besides coming off different absolute bases as noted above, also aggregate wildly different policy regimes. South Korea and Burma haven't exactly been peas in a pod, nor have Chile and Argentina.

3) An industrial policy can "work" in the sense that it fails to block development. The problem is that we don't know how much growth is because of, rather than in spite of. the policy.

Japan's auto industry is a good example of this. Infant-industry protection/export promotion helped their auto industry get rolling in general. But the bureaucracy's hostility to Honda only failed to choke that company because of Honda's superb technology and management. The Fifth Generation computer project likewise looks a lot more like the American synthetic fuels boondoggle of the 1970s than it does a brilliant piece of industrial policy.

4) Ed Phelps has pointed out that institutions suited to replicating known consumption patterns are likely to stagger once the consumption frontier is reached and product innovation is called for. That's not a big problem for developing countries, whcih still need to catch up to OECD consumption, but once they get there they'll need to dismantle the industrial policy approaches that worked up to that point. Because of the usual public choice inertia, that may be a tall order. Countries that develop without an industrial policy apparatus avoid this long-run problem.


Prof. Rodrik,

I think your work has adeptly shown that there does exist a public good, industrial infrastructure (both of mortar and of men), wherein the private benefits are not always enough to justify investment while the social benefits ARE.

The question is how do you respond to this failure. In the past, we let tycoons have monopolies, such as the railroad, for a while. This is obviously imperfect.

However, rather than a government-led investment firm, why not changing the rules to create a market for private gain that rewards venture capitalists for finding and developing these new industries.

Obviously, the nature of these investments precludes the type of bidding we see for computer parts, but it would still seemingly be able to have a competitive market system.

This would also be a great opportunity to network with other countries through a voluntary charter (which Collier's Bottom Billion makes a big deal about, and I think he has something), which would create a large market for these new Venture Capital 'new industry' firms to sharpen their expertise, demonstrate their ability, and compete for jobs.

So I guess my question is, why is it better to let the government run development rather than subsidize private firms? Shouldn't we be interested in enlarging the market for this 'industrial policy' by pushing a private VC strategy with other countries and letting our government focus on becoming very good at assessing proposals from experts, rather than becoming experts on every industry themselves???


I guess the equivalent of the portfolio diversification strategy is to leave the problem to multinationals. They would pick the stocks/winners according to your comparative advantages. If you are lucky and have CA in skilled labor (plus locational advantage as the post-communist EU members), then MNC can deliver meaningful "industrial policy". However, if your CA is in commodities, then you are reduced to supplying them to world markets. Without MNC industrializing you, Mr. Summer's recommendation would keep you stuck in mud and poverty.


"I have always felt that the analogy is misleading because it presumes there is the equivalent of a "diversified-portfolio" strategy for developing countries..."

We can argue over its success, but basic private sector development - intellignetly but continually attempting to reduce administrative barriers, reforming corrupt/inept institutions, ensuring that utilities are as efficient as possible etc - is (relatively) not targetted at particular sectors or industries, but can benefit a wide variety of entrepeneurs.

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Is there an exact reason when latin used free trade growth being a lot lower rather then when they used protectionism?

Looking at America's economy I think they use excessive forms of protectionism, even though they fight for free trade. The agriculture industry imports goods at such a low price to world market but cost 3-5 times more here in America. One reason is the government is covering the difference but isn't this a form of protectionism. If it is then the only way to grow is using protectionism rather then free trade.

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"I have always felt that the analogy is misleading because it presumes there is the equivalent of a "diversified-portfolio" strategy for developing countries..."


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There is no way to compare growth rates across the world over a 40 year period without taking into account all the many unique factors at play. Using the figures to justify any economic model is just too much of an over-simplification and smacks of ideology, not science.


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