Dani Rodrik's weblog

The forgotten side of FDR

... by economists at least. FDR was an experimenter who understood the need for institutional innovation during uncertain times.  Here is what he said in May 1932:

The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach.

Repeat after me: "bold, persistent experimentation." 

The question for the members of Obama's old-new economic team is whether they will remain true to their fundamentally conservative instincts, or engage in the creative experimentation for which their ample talents render them highly suitable.

I like the Kindle but...

If you own the Amazon Kindle, did you know that you could get this blog delivered automatically on it for a price of 99 cents a month?  No, neither did I. 

I was checking the other day to see if my book One Economics, Many Recipes has a Kindle version. The answer is that it doesn't (Princeton University Press take note), but apparently my blog does. 

I suppose I should feel flattered that Amazon has decided to include mine among the 1,163 blogs they offer on the Kindle.  And one cannot expect that they would be doing it for free since it costs them something to send the stuff over their wireless network. But a note would have been nice.

Your crisis, my crisis

David Leonhardt attributes the following thought to Larry Summers: "any system that created the Mexican peso crisis, the Asian financial crisis and the current troubles needs to be changed."  I couldn't agree more. But I also cannot help but recall that at the time of the Mexican and Asian crises, it was far more common to attribute those mishaps to the misbehavior of the governments involved. 

When developing countries get into a financial crisis, the problem must lie with their venal politicians and lack of financial discipline.  When it is U.S. that is in trouble, the fault must lie with the system.  Of course.

More on financial innovation

... from Steve Waldman.  I am now traveling and hope to return to this topic soon.

A debate on free trade

... with too little disagreement for some people's tastes.

Where are the HKS graduates?

Not in the top ranks of the incoming Obama administration. David Brooks:

Jan. 20, 2009, will be a historic day. Barack Obama (Columbia, Harvard Law) will take the oath of office as his wife, Michelle (Princeton, Harvard Law), looks on proudly. Nearby, his foreign policy advisers will stand beaming, including perhaps Hillary Clinton (Wellesley, Yale Law), Jim Steinberg (Harvard, Yale Law) and Susan Rice (Stanford, Oxford D. Phil.).

The domestic policy team will be there, too, including Jason Furman (Harvard, Harvard Ph.D.), Austan Goolsbee (Yale, M.I.T. Ph.D.), Blair Levin (Yale, Yale Law), Peter Orszag (Princeton, London School of Economics Ph.D.) and, of course, the White House Counsel Greg Craig (Harvard, Yale Law).

What is striking in this list is the predominance of law school graduates, even though law schools make no claim to teach you policy and politics--unlike, say, the Harvard Kennedy School.

HKS faculty members have been active in the Obama campaign, and many of them (such as Jeff Liebman and Samantha Power) are expected to land senior positions. Also, HKS graduates figure prominently among political leaders abroad: the presidents of both Liberia and Mexico are HKS graduates. 

But in the U.S., the situation seems quite different. If you are bright and are contemplating a potential career in American politics, you go to a top law school--not a public policy school.  This does not seem to have changed much in recent decades despite everything HKS has done to make itself visible and relevant.  Why?

Protectionism or far-sightedness?

From Bloomberg:

French President Nicolas Sarkozy said the government and a state-owned lender will raise 6 billion euros ($7.6 billion) to create a sovereign fund aimed at protecting and developing the country's ``strategic companies.''

...

The creation of the fund is aimed at implementing Sarkozy's plan, announced last month, of protecting strategic French companies from ``foreign predators'' and helping them survive the global financial crisis. The turmoil has wiped out about 45 percent of the value of the benchmark CAC 40 index, choked bank lending and left businesses struggling to find financing.

``I won't let foreign funds get bargains thanks to the current levels of the stock market,'' Sarkozy said today near Tours, central France. ``I won't let French industry move out.''

You can think that this is another instance of silliness by the French--and a worrying sign of the kind of protectionism that we will be increasingly seeing.  Or you can believe that the stock markets have overshot and that the acquisition of controlling stakes in domestic companies by foreigners at fire-sale prices is an unnecessary transfer of wealth outwards.  If you think the latter, it may make sense for a government (that is less liquidity-constrained than domestic private investors) to engage in this kind of activity. 

Of course, the French government could simply try to prop up the French stock market by buying equities across the board.  But presumably that is a lot more expensive than selective purchases in firms most likely to fall into foreign hands.

International finance and economic growth

The Commission on Growth and Development has put out a nice survey by Maury Obstfeld of the impact of international finance on growth in developing countries.  Here is the first part of the abstract:

Despite an abundance of cross‐section, panel, and event studies, there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries. The econometric difficulties are similar to those that bedevil the literature on trade openness and growth, though if anything, they are more severe in the context of international finance. There is also little systematic evidence that financial opening raises welfare indirectly by promoting collateral reforms of economic institutions or policies. At the same time, opening the financial account does appear to raise the frequency and severity of economic crises. Nonetheless, developing countries continue to move in the direction of further financial openness.

The paradox that Obstfeld points to is an important one, which has long puzzled me. Why have so many developing countries embraced financial globalization despite the hard-to-locate benefits and all-too-apparent costs?  Obstfeld's preferred answer is this: 

A plausible explanation is that financial development is a concomitant of successful economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from cross‐border financial flows. This survey discusses the policy framework in which financial globalization is most likely to prove beneficial for developing countries. The reforms developing countries need to carry out to make their economies safe for international asset trade are the same reforms they need to carry out to curtail the power of entrenched economic interests and liberate the economy’s productive potential.

This is an interesting hypothesis, but I am not sure I agree with the final sentence.  Some of the most stupendous development successes of our time have been based on subsidized credit, a certain dose of financial repression, development banking, and managed exchange rates, all of which require controlled, rather than liberalized, finance.  See South Korea, Taiwan (both of them during the 1960s and 1970s), and China, in particular. 

I think an alternative explanation is ideology and the zeitgeist. The dominant narrative of multilateral institutions, the G-7 and most economists has been very kind to financial globalization--lack of evidence notwithstanding.  The policy and intellectual climate has been hostile to managing capital flows. So governments have been reluctant to deviate from the norm lest they become identified as renegades.   

While we are on international finance, see also Henry from Crooked Timber, who elaborates on the dilemma of global finance in a world of divided sovereignty.

Trade protection and growth

Ugh, yet again!  But the question of whether trade liberalization/protection promotes or retards economic growth is one of those venerable topic of discussion in economics that simply refuses to go away.  See for example Ha-Joon Chang's recent op-ed in the FT.  One reason is that much of the discussion is driven by pre-conceived ideas (on the efficacy of markets versus governments) instead of actual evidence.

Two recent papers represent a significant advance.  One, by Lehmann and O'Rourke focuses on the late 19th century, while the other, by Estevadeordal and Taylor, looks at the last thirty years.  The chief contribution of these two papers is that they actually differentiate between different types of tariffs.  Lehmann and O'Rourke distinguish between tariffs that protected industry, tariffs that protected agriculture, and tariffs intended to simply raise revenue.  Their conclusion:

Industrial tariffs were positively correlated with growth. Agricultural tariffs were negatively correlated with growth, although the relationship was often statistically insignificant at conventional levels. There was no relationship between revenue tariffs and growth.

The sample of countries is a group of mostly developed countries over the period of 1875-1913. 

Estevadeordal and Taylor, meanwhile, distinguish among tariffs on capital, intermediate, and consumer goods (plus they use an imaginative identification strategy to alleviate reverse-causation concerns).  They find that it is mainly tariffs on capital and intermediate goods that retard growth, while tariffs on consumer goods have a much weaker effect.

Now, the two sets of results are somewhat in tension with each other, and it is not clear whether the differences are due to differences in statistical methods, or to the fact that the late 19th and late 20th centuries were inherently different, with the former being a period in which protection of industrial goods was good for growth while the latter was one where, at best, it was not too damaging.

Regardless of reconciliation, the bottom line is this: what matters is the structure of protection (what is being protected).  The answer to the age-old question is one that economists should be accustomed to giving: it depends.

And of course one thing that it depends on is the overall state of the global macro-economy.  At a time when the world is digging deeper into recession, exporting your problems through trade protection is the last thing that any responsible country should be doing.

And now the real G-20 Communiqué

Give me credit for getting exactly right the first eight words of the G-20 statement issued today, but otherwise there is a fair bit of daylight between my version and the official one.

I was not expecting any substantial agreement on international regulatory coordination or any semblance of a new Bretton Woods, so I am not disappointed on that score.  What I was looking for were three things: (i) coordination on fiscal stimulus; (ii) a commitment to provide more liquidity support, as needed, to prevent a further spread of the crisis to emerging nations; and (iii) a clear commitment not to engage in trade protection, with a monitoring mechanism to ensure the pledge is being observed.

How does the statement do in these regards?  So-so.  There is no coordination in the fiscal arena, the promises made to emerging markets are vague, and even though there is a clear statement on protection and export subsidization, there is no monitoring or enforcement mechanism.

What about the longer-term issues? The fundamental dilemma of financial globalization is that regulation and supervision remains national while financial markets are international.  The statement recognizes this dilemma:

Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability. However, our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international standards, where necessary, and their consistent implementation is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability. Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace.

The "action agenda" outlines several areas of international cooperation and coordination in the months to come.  Finance ministers and national regulators are tasked with the responsibility of bringing these recommendations to life.  As I said in my own version of the statement, "a key challenge will be ... to strike an appropriate balance between common international regulations, on the one hand, and space for domestic approaches that may diverge from harmonized regulations, on the other."