Dani Rodrik's weblog

If you are in Washington, D.C. on Thursday

... and have a couple of hours to waste, feel free to drop by.

"Don't Trust Outside Experts"

So says the headline of an op-ed in the Zambian Post. I couldn't agree more. My rule is: listen to what foreign experts have to say, but make your own decisions.

But wait. I am one of the foreign experts that the article refers to!  Even though I and my colleagues are not named, the editorial is about a brainstorming that the World Bank had organized with us (and which had already stimulated this blog post). The author of the op-ed, Father Peter Henriot, was present as a representative of Zambian civil society via videoconference.

Reading Father Henriot's article, it is clear that we came across as arrogant outsiders with little knowledge of Zambia and ready to advance ill-fitting policies.  For me, this is an interesting lesson in failure to communicate.

The central dilemma that we were trying the participants to recognize is that helping the poor in a sustainable way requires promoting structural change. That in turn may require making investments in areas--non-traditional economic activities or urban areas--which have a greater potential for generating productivity increases than the areas where the poor currently are. 

Investing in the poor directly--augmenting their human capital--is desirable in and of itself, but whether it constitutes a growth policy (in addition to social policy) depends on whether lack of human capital is a binding constraint on economic opportunities.  The question here is whether there are profitable employment opportunities for the poor to deploy their human capital in. Often, the answer is no. We have plenty of experience, from Africa in particular, that it is possible to achieve striking increases in educational attainment (and often life expectancy as well, in non-HIV/AIDS-stricken countries) without corresponding improvements in overall productivity of the poor or of the economy as a whole. 

On the other hand, saying that you should increase economic opportunities while enhancing human capital assumes away the trade-offs: increasing social spending--without cuts in other areas--serves to appreciate the real exchange rate, which is the single most effective way of killing production incentives in non-traditional economic activities. Disregarding this evidence and the implied trade-offs is not very helpful.

So why were we unable to get these points across? First, the videoconference setup did not help. Videoconferencing is more conducive to speech-making than to exchanging ideas.  Second, our language probably did not help either.  As economists, we use lots of shortcuts and skip steps in our arguments when we are amongst other economists. This can lead to misunderstanding when there are non-economists present. (Clearest example of this is that Father Henriot took us to be making an argument in favor of trickle-down growth. We were not. It is precisely because I recognize that growth may not necessarily trickle down in the short-run that I argued for a social policy in addition to and coordinated with a growth policy.) And third, let's admit it, we are often arrogant and presume to know more about the determinants and consequences of economic behavior than our track record justifies.  (For example, we may have been too quick in assuming that most of the non-traditional high-productivity activities would be urban, whereas there is some evidence that many of them may be found in rural areas as well.)

I would like to believe that all these sources of miscommunication and misunderstanding would have been sorted out if we had a chance to discuss these issues at greater length with Father Henriot. Even if we could not come to an agreement on the policies to be followed, at least he may have ended up with a better idea of where we are coming from and why our take may differ from his with regard to appropriate strategy--and perhaps also with just a few doubts about how strongly he should hold his own views. 

But note to self: avoid videoconferencing next time and do remember who the audience is...

A happy day...

is when you receive a book titled Power and Plenty: Trade, War, and the World Economy in the Second Millennium by Ron Findlay and Kevin O'Rourke and you start reading it even though you are late on several papers...

Ron Findlay is one of the most erudite economists I know, and as perfect a gentleman as you will ever find in academia. I've always thought of him as an anomaly at an institution like Columbia, where egos don't come in small sizes.  Now I know why he has been so quiet of late: the book is more than 600 pages long and it does cover 1,000 years of economic history.       

And what a book it is.  Disarmingly, Findlay and O'Rourke let us know that "As is the case with many books, this one has been written for the primary benefit of the authors."  Comparing international trade in history with the version one encounters in textbooks, they write:

the greatest expansions of world trade have tended to come not from the bloodless tatonnement of some fictional Walrasian auctioneer but from the barrel of a Maxim gun, the edge of a scimitar, or the ferocity of nomadic horsemen.  When trade required more workers, parental choices regarding quality/quantity trade-offs could often safely be ignored, since workers could always be enslaved. When trade required more profits, these could be earned via plunder or violently imposed monopolies. For much of our period the pattern of trade can only be understood as being the outcome of some military or political equilibrium between contending powers.

Sort of humbling when you have to go to class and motivate Heckscher-Ohlin.

And I am only on page xix.  Please, someone take the book away--I have work to do...

Sweatshops, sweatshops everywhere

The New York Times has discovered to its horror that Manhattan's manhole covers are made in India under working conditions that would be considered appalling by most of its readers. 

Seemingly impervious to the heat from the metal, the workers at one of West Bengal’s many foundries relied on strength and bare hands rather than machinery. Safety precautions were barely in evidence; just a few pairs of eye goggles were seen in use on a recent visit. The foundry, Shakti Industries in Haora, produces manhole covers for Con Edison and New York City’s Department of Environmental Protection, as well as for departments in New Orleans and Syracuse.

The scene was as spectacular as it was anachronistic: flames, sweat and liquid iron mixing in the smoke like something from the Middle Ages. That’s what attracted the interest of a photographer who often works for The New York Times — images that practically radiate heat and illustrate where New York’s manhole covers are born.

When officials at Con Edison — which buys a quarter of its manhole covers, roughly 2,750 a year, from India — were shown the pictures by the photographer, they said they were surprised.

“We were disturbed by the photos,” said Michael S. Clendenin, director of media relations with Con Edison. “We take worker safety very seriously,” he said.

An embarrassed Con Edison says that it is now rewriting its international contracts to include safety requirements.

Fine, but what if these requirements now raise the cost sufficiently for the utility to want to switch its supplies to another source? And what if these West Bengali workers now find themselves out of a job, or earning less in even worse working environments?  Would we have we done them any favors by becoming outraged at their condition?

This is one of the trickiest issues in international trade, and one for which there is no straightforward answer that I can think of.

Libertarians and fair-traders, which make an odd couple, do have a solution: they would say let consumers have information about the full hedonics--all the characteristics of a good, including the manner in which they are manufactured--and then let markets take care of it.  So if Con Edison believes its customers value the welfare of West Bengali workers, it ought to be willing to pay for the extra costs its suppliers incur for running safe factories. No regulation is required; just better information.

But if you believe information and markets can address this problem, you must also believe that consumers have a good idea about the costs of improving workplace conditions and can solve complicated general-equilibrium models each time they decide how much to pay for toys from China or towels from Pakistan.  For what is at issue is not just "do you care for workers over there?" but also "do you understand the full general-equilibrium consequences of what would happen to the workers concerned?" Market intermediaries can help, but we need to ask in turn who will keep them straight and honest.

Doing growth diagnostics well

The language of "growth diagnostics" and of "removing binding constraints" is becoming so commonplace in multilateral agencies and donor organizations these days that I sometimes wonder whether we have not unleashed something out to the real world before its time. The trouble is that what I see being implemented in practice is often the rhetoric and not the substance.

That is because the framework cannot be applied mechanically and requires an inquisitive, detective's mind-set. You need to use economic theory and evidence judiciously to look for a series of clues that will identify the most likely suspect. So while the approach comes with a decision tree (reproduced below), which probably accounts for its good reception in policy circles, it is different from just checking a series of boxes--which is what is often done. There is an element of craft in doing the diagnostics right, but it is a craft solidly based on economic science. 

Here are some of the hallmarks of a successful growth diagnostics exercise:

• moving downwards in the decision tree, rather than upwards or sideways (you move by eliminating constraints, not by considering them all one by one);
• working off at least an implicit model of what drives (or will drive) growth in the economy;
• looking for the tell-tale symptoms that a given constraint binds (if growth is constrained by saving, the economy should be running against its external balance constraint, interest rates must be high, and borrowers must be chasing lenders rather than the other way around; if the constraint is human capital, the skill premium must be rising while returns to complementary factors remain depressed)
• looking for clues that the hypothesized constraints are consistent with recent growth experience (i.e., did growth boosts occur when those constraints were relaxed? a constant cannot explain a change); 
• using firm-level surveys critically, cognizant that complaints do not always accurately identify binding constraints (businesses may complain about access to finance when the real trouble is that they cannot document profitable projects; or respondents may be the established firms that do not represent the most dynamic part of the economy);
• locating successful firms or sectors and tracing their success either to their low intensiveness in the hypothesized constraints or to special circumstances that allowed these activities to overcome the constraints;  
• combining cross-national benchmarking, firm-level surveys, and aggregate macroeconomic data in an eclectic manner as the nature of the question demands.

That the framework has to be applied with care and in an economically sophisticated way rather than mechanically is also the main message I take from some of the critiques that have begun to appear (see for instance the papers by Dixit and by Aghion and Durlauf). The framework does not economize on inputs (the thoughtfulness required to reach decisions), only on outputs (the list of things that we recommend governments should do to get growth going). 

Encouragingly, there are some quite good exercises along these lines, showing how the framework can be used to good effect and to shed light on the requisite policy agenda. See for example the studies on Egypt by Klaus Enders, Bolivia by Sara Calvo, and Mongolia by Elena Ianchovichina and Sudarshan Gooptu.

I know from my own experience that there is still a lot that we need to learn about how to do this right. To those who say that the framework is difficult to implement in practice, my answer is "right, it is indeed hard to determine policy priorities, but this approach at least forces you to confront those difficulties in a systematic way." 

You have got to be a real trade buff to enjoy this post

Rich countries engage in international trade more than poor countries do. They also have more diversified export baskets. That much is pretty well known. But how exactly is this increase in the volume of trade and greater diversification achieved?  Is it through greater volumes of exports of the traditional kind, or through new products that were not previously exported?  There is now a small cottage industry that has been looking at these questions, shedding light on the role that international trade and its transformation plays in the economic growth process.

An interesting paper by Céline Carrère, Vanessa Strauss-Kahn, and Olivier Cadot generates some new results.  These authors analyze 6-digit trade statistics to decompose the average pattern of export diversification during economic development into a "within" and "between" component:  The first of these ("within") refers to the component of concentration that is due to concentration within traditional export categories, whereas the second component ("between") captures the part due to new exports.  The figure below shows the trends for these.

 

Note first that overall export concentration falls during much of economic development, and then begins to rise again once a country reaches a high-income level.  This is similar to what Imbs and Wacziag have found for production and employment in a paper that used much more aggregate data.

Second, even though the "within" component accounts for the major part of overall concentration, it is largely the "between" component that accounts for the U-shaped trend in concentration over the development process.  This is important because we know from other work (e.g. that of Lederman and Maloney) that export diversification is good for growth. 

This is the strongest evidence to date that I have on the role that new products play in shaping the pattern of export composition during the development process.

Pro-poor growth, social growth, or just growth?

Income per head in a landlocked African country stands at a fraction of levels it had reached in the 1970s, with only the last few years seeing some decent economic growth. What kind of a growth strategy should this country follow? A strategy that focuses on expanding employment opportunities in the rural areas where most of the poor live? Should it consist of expanding their capabilities, by investing directly in education and health? Or should it focus on wherever the economic activities that will provide sustainable sources of income growth into the future lie, even if these may be in mostly urban areas and likely to foster greater inequality in the short-run? 

These are the unexpected questions which a meeting with the World Bank raised, as we were discussing growth diagnostics and binding constraints for the country in question.  When my colleagues and I pushed for a growth strategy that focused, well, on growth, the reaction from the World Bank staff present was skeptical. It was prop-poor growth they wanted. And even greater concern was expressed by a member of "civil society" participating in our discussion through video-conference. Growth should be social growth, which means investing in people, he argued.

Here is how I see it.  Having a growth strategy that focuses on growth proper--and on removing the most binding constraints on it--does not mean that you don't care about poverty or inequity. It just means that you recognize different targets require different strategies. I recognize that a growth policy may not necessarily achieve significant poverty reduction in the short-run. That is why there is always room for social policy. Growth policy is not social policy--at least not necessarily in the short to medium-run (although in the long-run it probably is the most effective social policy we can think of). But it is indispensable to generate a sustainable increase in the economy's resources and long-run living standards.

(Sometimes you get lucky and your growth strategy coincides pretty well with what your social policy ought to look like. In South Africa, for example, growth and equity both require generating employment opportunities for currently unemployed unskilled black workers. An employment subsidy targeted at these workers is probably the most direct instrument for achieving both ends.)

And by the same token, social policy (targeting the poor directly) should not be confused for a growth strategy. Trying to come up with "pro-poor growth strategies" may backfire if it shortchanges us on growth while distracting us from the need for proper social policies. 

Getting it from the left

I was at the University of Massachusetts Amherst yesterday, giving their annual Philip Gamble Lecture.  The department of economics there is an unusual one. For one thing, they hand you a bag of cider donuts and a bunch of chocolate chip cookies before your talk--which should really be made standard practice in the lecture circuit. More substantively, the department is well known as the hangout of left-wing critics of economics and economic policy, so I had a different reaction to my talk than I am accustomed do.

Instead of getting questioned on whether I am downplaying the benefits of further trade and financial liberalization, I was quizzed on why I thought standard economics was at all a useful starting point for my policy agenda.  And instead of people being worried about how policy space would be abused by developing nations, I was asked whether international financial institutions and multinational enterprises would ever tolerate such a thing. I don't think my answers--yes, indeed standard economics does help you analyze the real world as it is, and no the real problem is that developing countries are giving away voluntarily the policy space that they should treasure--convinced anyone.

Which reminds me of what someone once said about my work, that it is perfectly calibrated to annoy both the adherents and opponents of the standard way of doing economics.  What a way to win friends and influence people...

More than you ever wanted to know on CO2 emissions

Want to know how much CO2 is emitted by the power plant across town, and how it compares to the one in the city you are planning to move? The Center for Global Development has just launched a web site that will tell you exactly that.  In fact, the site has emissions data for every single power plant in the world--some 50,000+ power plants and 20,000+ power-producing companies. 

Called the CARMA (CARbon Monitoring for Action) website and database, the site focuses on the global power sector, the largest carbon emitter industry.  It has reported or estimated data on current emissions, emissions in 2000, and future emissions based on published capacity expansion plans. It is a downloadable database, with tools for ranking and comparing power facilities, power companies, and geographic areas.

For those plants that have not reported their emissions publicly, CARMA provides "estimates based on the latest plant-level technical information, a statistical model fitted to data for thousands of publicly-reporting facilities, and adjustments for national differences in capacity utilization." 

This is an amazing treasure trove of data. It will set into motion an interesting experiment on what transparency can achieve with respect to public activism and corporate responses. 

What does the "rule of law" mean?

Am I the only economist guilty of using the term abundantly without having a good fix on what it really means?  Well, maybe the first one to confess to it. So central has the concept become in discussions on "institutions and growth" that it has become unavoidable.  It's sort of like no-economists talking about, say comparative advantage, without quite getting what that means.

Well, actually not quite. What economists mean by comparative advantage is clear. But legal scholars and political theorists have many conceptions of what the "rule of law" means; in fact, the meaning itself is contested.  That, among many other things, is what I have learned from reading a fascinating new manuscript from Michael Trebilcock and Ron Daniels--ranging from very "thin" descriptions (rule of law is whatever provides for stability and predictability) to "thick" conceptualizations (rule of law as a form of political morality).  Trebilcock and Daniels favor something in between (but are closer to the "thin" definition), formulating a procedural approach that they argue that is consistent with a variety of approaches to economic development (both Amartya Sen and Doug North, to use their figureheads).  

What is really useful in the manuscript is a series of comprehensive and detailed case studies on rule-of-law reforms from around the world, ranging from judiciary to police reform. It ends with a very sensible policy agenda for would-be reformers. 

Called "Rule of Law Reform and Development," the manuscript is not yet published, but be on the lookout for it.

UPDATE: I just received a copy of the new North-Holland Handbook of Law and Economics (yes one of those outrageously priced monstrosities). Interestingly, it has nothing on the rule of law or on law and development.

And Dominic, we do have an excellent core course on legal institutions and development in our master's program, taught by our very own Fred Schauer, a very distinguished legal scholar. So we are ahead of the game.