Dani Rodrik's weblog

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.

Free-trader fear mongering

I like Fred Bergsten a lot. He named, supported, and published my book Has Globalization Gone Too Far?--despite the loud protests of some on his board of directors. I am a member of his advisory committee at the Peterson Institute (although it has been a while since I have attended the annual meetings).  But I think he goes overboard in his WSJ oped today when he says that Democratic refusal to play by usual trade rules represents the "the gravest threat to the global trading system in decades."

What is at issue is Nancy Pelosi's decision to effectively kill "fast track" procedures that guarantee a yes-or-no vote on trade agreements within 90 days.

The immediate effect is to scuttle the pending free trade agreements with Panama and Korea, as well as Colombia, and to end any remaining prospect for an early conclusion of the Doha Round in the World Trade Organization.

The much more profound impact, however, is to remove the U.S. from any significant international trade negotiations for the foreseeable future. Current and former chief trade officials of three of the world's largest trading entities have told me that, since the House action, the U.S. has lost all credibility. In other words, the "time out" proposed for trade policy by one of the major presidential candidates – a central goal of the opponents of globalization – has already been called.

If this is indeed a time out, I say "good"!  For the real threat to the global trading system today is not that we will forgo signing more trade agreements, but that we will fail to implement the reforms needed to sustain globalization.  By presenting the debate as one between globalizers and anti-globalizers (instead of what it really is: a debate over the rules that govern globalization) globalization's cheerleaders are radicalizing and doing considerably more damage to the economic system they admire so much.  It is time to give up on the bicycle theory.    

Larry Summers, who recently assumed the chairmanship of Bergsten's advisory committee, has it right when he points to the unhelpfulness of those who would argue that

economists should stick with the mantra “freer trade is good” and not acknowledge in newspapers the implications of their models for fear of emboldening protectionists. This is a dangerous game. It is ethically problematic to withhold knowledge in fear of its misuse. It is likely over time to undermine the credibility of the experts who fail to share all that their science knows. And most importantly as demonstrated by recent debates the strategy of sweeping distributional issues under a rug and simply insisting on various kinds of dislocation assistance has been a political disaster for advocates of freer trade.

Lamy's lament

Nothing of substance comes via snail mail these days. It's just brochures, catalogs, and bills. So I almost threw away the nondescript envelope marked "WTO" that arrived on my desk the other day without opening it. 

That would have been a mistake! It turns out that it was a three page, single-spaced letter from Pascal Lamy, the WTO Director General himself. Mr. Lamy has read my book, you see, and he wants to give me comments on it.  I know the Doha Round is stalled, but still...

Lamy's comments focus on the chapter titled "The Global Governance of Trade as if Development Really Mattered" (here's an earlier version).  He writes that he wants to make some observations that are "primarily factual, dealing with some of the assumptions underlying your arguments."  What he really means to say, I think, is that I do not quite understand how the WTO works, and therefore reach erroneous conclusions. 

His letter is too long and elaborate to summarize quickly, but here are the main points:

1.  Developing countries already have the "policy space" they need within the existing set of rules, as WTO practice has always been to encumber developing nations with fewer obligations than rich countries. If there is a conflict between a "trade mind set" and a "development mind set," it arises from the choices that developing nations themselves make (to use the institution in a particular way) rather than from the constraints that the institution imposes.

2.  The world is more complicated than a binary distinction between developed and developing would suggest. Least developed countries still get an essentially free ride.  Meanwhile WTO disputes revolve around advanced countries and a small set of higher-income developing countries considered to be serious competitors.

3.  My ideas on expanded safeguards are "interesting," but they do not address the more important question of what should and should not be included under the WTO system of multilateral rules and to whom these rules should apply.

4.  It is questionable that an international agency would find it easier to make judgements on the legitimacy of domestic decision-making processes--as I had advocated in my book--than to hammer out the details of differentiated obligations among negotiating partners.

5. One should not place small weight on market access--as I do--in a world where developing nations themselves make a big deal out of it--not just in terms of tariff peaks in the rich countries but also in terms of barriers to trade among themselves.

And oh, he does congratulate me for producing "such a thought-provoking, original and readable contribution to the literature."

Lamy hits on an interesting paradox. I regard a development-friendly world trade regime as one that would begin to emphasize the exchange of policy space over the exchange of market access. But the loudest advocates of market access are the developing nations themselves!  So Lamy is perfectly right to say: you tell us to pay more attention to the needs of developing nations, but what the developing countries say they need is market access. 

I think the trouble is that developing nations (a) greatly exaggerate how much enhanced market access will contribute to their economic growth (given how open the world economy already is), and (b) underestimate how much they can push for market access without giving something valuable (policy space) in return.  There is precious little that the WTO itself can do when developing countries--or at least their trade ministers--operate under these premises.      

By the way, according to Wikipedia, Lamy graduated from ENA ranked second in his class in economics.   

This one for French speakers only

The French newspaper Le Monde ran a lengthy article on our MPAID program in its education supplement. Frankly I wasn't quite sure how this one would come out since the journalist who wrote it (and who attended some classes including mine) seemed quite skeptical about what we were doing. But in the end we seemed to have overcome his suspicions. (I am referred to as "le president du MPA-ID, Dani Rodrik." That sort of has a nice ring to it...)

The article contains interviews with our students and vignettes on what our graduates are doing currently.  It is in French, but you can read it here: Download le_monde_de_leducation_article_harvard.pdf

Does the food price crisis enhance the case for self-sufficiency?

The rise in food prices and the costs it generates have been aggravated, some say, by policies of import liberalization and subsidy removal which the World Bank and economists advocated around the developing world in the 1980s and later.  If developing country policies supporting food crops had not been dismantled, this argument goes, poor people in these countries would not have been left in the throes of volatile world market forces and they would not have suffered as much recently.

A Bloomberg news story cites the plight of Honduran farmer Fidencio Alvarez:

Honduran farmers like Alvarez can't compete in a global marketplace where the costs of fuel and fertilizer soared and rice prices doubled in the past year. The former breadbasket of Central America now imports 83 percent of the rice it consumes -- a dependency triggered almost two decades ago when it adopted free-market policies pushed by the World Bank and other lenders.

The country was $3.6 billion in debt in 1990. In return for loans from the World Bank, Honduras became one of dozens of developing nations that abandoned policies designed to protect farmers and citizens from volatile food prices.

...

Rice farmers in Honduras were protected by the highest import tariffs in Central America when former president Rafael Callejas took office in 1990 with the economy stalled. The trade barriers that helped the country meet more than 90 percent of domestic demand were dismantled under an agreement for a World Bank loan in September that year, allowing cheaper imports to flood the market.

The requirements for the loan included eliminating import restrictions and surcharges and reorganizing the agricultural finance system, according to Eurodad, a network of 54 European non-governmental organizations that was granted access to the World Bank's loan database to monitor loan conditions.

Prices paid to farmers fell by 13 percent in 1991 and 30 percent more in 1992, according to the Food and Agriculture Organization in Rome.

In August 1993, the World Bank advised Honduras to adopt a second round of economic changes as part of another loan, according to Eurodad. Those conditions included eliminating all price controls and cutting tariffs further.

``Remaining trade and price controls should be eliminated,'' bank officials said in a 1994 internal report. ``The program of privatization of state silos should be completed; and the use of a grain reserve for price stabilization should not be reinstated.''

The report's author, Daniel Cotlear, now a World Bank economist for Latin American and the Caribbean, declined to comment for this story.

The bank pushed the policies because food prices fell in real terms for at least two decades, and few economists expected that to change, said Mark Cackler, manager of its Agriculture and Rural Development Department. Free trade and open markets remain the best path to competitiveness, he said.

I must say that I do not quite understand the argument of those who criticize the earlier liberalization. It seems to me odd to fault the World Bank for advice some 15 years ago to eliminate import protection--so that domestic prices could come down at the time--while at the same time complaining about high prices now, even with the benefit of hindsight.  If developing countries had all kept their import protection, the global supply of food would have been lower today, not higher. (That is because import protection would have led global production to be reallocated from efficient exporters to inefficient importers.) If you are for self-sufficiency, you must be willing to live with high prices.    

Unless that is you believe in a combination of dynamic learning effects with externalities, in which case temporarily high prices may be worth it because they result in low prices eventually. But it would be hard to make this case for food crops.

So the answer to the question in the title seems to me to be "no".