Dani Rodrik's weblog

Zoellick wants to remake development economics

World Bank president Bob Zoellick gave an interesting speech today at Georgetown. I wasn't there, but have seen his prepared remarks, which I find both forthright and courageous. 

From my perspective, the speech hits all the right notes: the need for economists to demonstrate humility, eschew blueprints, search for differentiated solutions suited to context, learn from the actual policies of successful emerging economies, focus on evaluation but not at the expense of the big questions.

Zoellick, admittedly not an economist himself, goes further and takes on the economics profession. He has many valid points.  He wades in on some of the key debates in the profession and doesn’t mince his words.  Particularly telling are his surprisingly frank criticism of the current fad with randomized evaluations, which he decries as being too narrow and too unconcerned with scalability, and his open-mindedness towards policies that promote industry through various forms of incentives.  

The main theme of his speech is “democratizing development economics.” I like this as a slogan, but fear that it may end up another gimmick.  Zoellick offers no new ideas on the governance and internal organization of the Bank. And without changes in these, the bulk of the Bank’s research will continue to be done in Washington, DC by economists from advanced nations.

The craziness in Turkey reaches new heights

A renowned Turkish police investigator, Hanefi Avci, is behind bars today, accused of having collaborated with a violent revolutionary organization. The charges make as much sense as Winston Churchill having been an undercover operative for Stalin.

To anyone but the most jaundiced observer, Avci’s real crime is obvious: he wrote a book in which he claimed that members of the Fethullah Gulen network within the police and the prosecutorial branch – followers of the U.S.-based Muslim spiritual leader –were using dirty tricks to frame and incarcerate perceived opponents.

Avci, a courageous and incorruptible police commander, can hardly be considered an ultra-secular, ultra-nationalist defender of the old guard. His worldviews are much closer to the Gulenists that he now accuses. That is what lent credibility to his charges and made his book such a bombshell. He now appears to have fallen victim to the kind of machinations that he exposed in his own book.

Ironically, Avci’s arrest comes on the same day that another story exposing the dirty tricks broke. This one concerns the famed Cage Plan, which is one of the alleged Ergenekon plots that the police and the prosecutors are supposed to have uncovered. The Cage Plan is an operation that is said to be hatched by members of the Ergenekon gang to harass and intimidate minorities. Police claim that it was discovered in encrypted form on a DVD found in a retired naval major’s office.

A forensic examination in the United States has revealed that the DVD in question does not contain any such plan. Wherever the plan may have originated from, the source wasn’t the retired officer who is currently in jail. Unbelievable as it sounds, the U.S. forensic expert – a founder of NYPD’s computer crimes investigation unit – says there is little doubt that the police and TUBITAK just made it up when they alleged that the DVD contained the plan. It looks like the Cage Plan was written by perpetrators with the express intent of framing a group of naval officers and their superiors. No surprise here if you have followed the Sledgehammer case.

Don’t expect the Turkish media to dwell on these remarkable developments at any length. Turkey’s nominally independent media is under tremendous pressure to toe the government line and not offend the Gulen movement. The Dogan media group, for example, is reeling under a huge tax fine imposed last year. The reporters and columnists who understand what is going are effectively silenced, while the government-friendly media (Zaman, Star, Sabah, and so on) spew endless disinformation.

It is very difficult not to get depressed about the state of the country. All the more so since much of the Western media (as well as Washington, DC and Brussels) appear to be clueless about these goings-on and what they reveal about the nature of the government in power.

Growth reducing structural change

I have been doing some work on the relationship between structural change and economic growth in different parts of the world, and some of the early results are too striking to wait for the paper to come out.

Here is a chart that provides a key insight on why Latin America has done worse than Asia since 1990. The chart decomposes labor productivity growth in the two regions into three components: (i) a “within” component that is the weighted average of labor productivity growth in each sector of the economy; (ii) a “between” component that captures economy-wide gains (or losses) from the reallocation of labor between sectors with differing levels of labor productivity; and (iii) a “cross” component that measures the gains (or losses) from the reallocation of labor to sectors with above-average (below-average) productivity growth.

(The countries identified by “HI” are the high-income countries.)

Note first that Latin America does better than Asia in terms of the “within” component (the blue bars). The representative Latin America country has experienced faster productivity growth in its individual economic sectors than the representative Asian economy. (China is not included in this data set.)

Why then did Latin America do so much worse overall? Because the reallocation terms have contributed negatively to overall economic growth. Note in particular the hugely negative “cross” term for Latin America (the green bar). In Latin America, labor has moved from sectors with high productivity growth to sectors with low (or negative) productivity growth, offsetting to a large extent the large “within” effect and the much smaller (but still positive) “between” effect.

Here is what’s behind the large and negative cross effect. The scatter plot below shows the correlation for Latin America between the change in a sector’s employment share and the sector’s labor productivity growth.

The main message of the scatter plot can be summarized easily. Labor has moved from tradable sectors (agriculture and manufacturing) where labor productivity growth has been rapid to non-tradables, especially wholesale and retail trade, where productivity growth has been negative.

Put differently, the mechanism through which tradables have achieved significant productivity growth in Latin America (remember the large “within” terms noted above) has been to lay off workers. Such “rationalization” is OK from a partial-equilibrium perspective, but doesn’t look great when the displaced labor moves to sectors with worse performance.

As the first chart shows, Asia (where manufacturing has expanded rather than shrunk) has largely avoided this problem, and has ended up with superior overall performance.

Want to help me write my paper? Provide some hypotheses as to why the structural change patterns in the two continents have been so different.

UPDATE:  First, I should have pointed out that the underlying data for the charts here come from the Groningen Growth and Development Centre.  Second, in response to Tim Worstall’s puzzlement, the modern supermarkets he has in mind make up a tiny proportion of employment in “wholesale & retail trade.”  The bulk of employment in this sector is informal, which is why productivity is low and has plummeted further as the ranks of informality have swelled.  

An update on Turkey's legal machinations

To an empiricist, the hardest thing to understand is how people can continue to believe things that are patently false.  This has been a source of great frustration ever since I got involved in one of the landmark court cases going in Turkey.  The liberal intelligentsia, the prosecutors, much of the media, and of course the government have been having a field day over a coup plot that never existed.  Once you get your mind around the fabrication and the framing of innocent individuals, your ideas about Turkey are changed forever.

Here are the opening paragraphs of a new article on this.   

In just about three months, 196 active-duty and retired officers are scheduled to go on trial in Turkey, charged with plotting in 2003 to overthrow the then-newly elected Justice and Development Party (AKP) government. The alleged coup plot—codenamed Operation Sledgehammer—involved horrifying acts, including the bombing of mosques and the downing of a Turkish fighter, aimed at destabilizing the government and paving the way for martial law and eventual takeover.

If the charges prove to be well-founded, the country’s powerful military establishment will stand disgraced for harboring violent, anti-democratic elements among its senior ranks. And it will be the first time that civilians have brought it to account for its frequent political intervention. Turkish democracy will have gone through a rite of passage, emerging stronger. Conservative-Islamist groups—the AKP and their ally the Gülen movement, a network of the followers of the Muslim spiritual leader Fethullah Gülen—will be vindicated and their political dominance assured.

But if the prosecutors’ case crumbles, it is the government, the Gülenists, the prosecutors, the media, and much of the country’s intelligentsia that will find itself discredited. For these groups have fought hard in recent months to convince Turks (and Turkey’s friends abroad) of the veracity of the Sledgehammer coup plot.

The sad irony is that the facts of the case leave no doubt as to where the truth lies: Operation Sledgehammer is a fiction. Its authors are not the defendants in the case but unknown malfeasants who fabricated the documents sometime after 2008. Anyone with a couple of hours to spare—and a good command of the Turkish language—can see it for themselves. That the charges have been allowed to stand for so long—and that a trial will take place at all—is testimony to the intensity of the disinformation campaign waged by the AKP and its supporters.

The rest of the article is here.

Erdoğan’s Choice

“Turkish democracy is at a turning point,” Prime Minister Recep Tayyip Erdoğan announced after winning a crucial vote in a referendum to change Turkey’s constitution. “We are sitting an important exam.”

Erdoğan is right, but it is he who must pass the test. If the plebiscite victory emboldens him and his allies to step up their tactics of judicial dirty tricks and media manipulation – used to great effect in recent years – the prospects for Turkey are bleak. The country will descend deeper into authoritarianism, political divisions will become irreconcilable, and yet another political rupture may become inevitable. 

Read the rest here.

More on firing costs and unemployment during the crisis

My previous post has apparently produced some incomprehension. I thought it was a rather simple point, but I guess I should have been less telescopic.

Here is the point.

Spain’s unemployment has doubled since 2008, going from 10 percent to 20 percent. That is a hell of a shock to labor demand. Let’s assume, quite reasonably, that this shock to labor demand was unanticipated. Now, if the hiring costs were at all binding during this time, firms must have laid off fewer workers than they would have liked absent those costs. In other words, the unemployment rate would have risen even higher without firing costs.

If we now remove those firing costs, we make it easier for firms to shed the extra workers they have on their payroll. So unemployment has to increase.

Some commentators have the idea that with firing costs gone, the steady-state labor demand will be higher. I am not sure the empirical literature has established that point, but let me grant it for the purposes of the argument. So in principle some of the increased ability to lay off workers can be compensated by the desire to hire more workers since labor costs effectively have been reduced.

Can the second effect dominate the first? I don’t know. But given the magnitude of the negative demand shock during this crisis, I doubt it.

In any case, I find it weird that this policy is presented as a major tool for curing what ails labor markets at the moment.

(Some) economists’ topsy turvy world

Spain, where unemployment has risen to 20% and domestic demand has yet to recover, has just approved a labor reform law that makes it easier for employers to dismiss workers.

I hope someone from the IMF or OECD -- the two institutions responsible for convincing the Spaniards that such a reform is an urgent priority -- will explain to me how reducing the cost of firing workers can lower unemployment in the midst of a decline in labor demand. 

Is Chinese mercantilism good or bad for poor nations?

China’s trade balance is on course for another bumper surplus this year.  Meanwhile, concern about the health of the US recovery continues to mount. Both developments suggest that China will be under renewed pressure to nudge its currency sharply upward. The conflict with the US may well come to a head during Congressional hearings on the renminbi to be held in September, where many voices will urge the Obama administration to threaten punitive measures if China does not act.

In all this discussion, the renminbi is viewed largely as a US-China issue, and the interests of poor countries get scarcely a hearing, even in multilateral fora. Yet a noticeable rise in the renminbi’s value may have significant implications for developing countries. Whether they stand to gain or lose from a renminbi revaluation, however, is hotly contested.

On the one side is the argument (made most prominently by Arvind Subramanian) that developing countries suffer greatly from China’s policy of undervaluing its currency, which makes it more difficult for them to compete with Chinese goods in world markets, retarding their industrialization, and setting back their growth.

On the other side is the argument (made by Helmut Reisen and his colleagues) that developing countries, and especially the poorest among them, would be hurt if the renminbi were to rise sharply. Their reasoning is that currency appreciation would almost certainly slow China’s growth, and that anything that does that must be bad news for other poor countries as well.

Which is it? 

Find out here.

Who said economics is about forecasting the future?

Gideon Rachman of the FT wants to dethrone economists. I am all for it, but what grates in his article is the view that economics as a science is defined by its ability to forecast the future. No, it is not, and whoever said that is not very knowledgeable about economics as a discipline.

Well, except that Rachman takes his definition from … Joe Stiglitz! 

I am sure Stiglitz would recant, or at least argue that his comment was taken out of context, upon close examination.  At best, economics can help us make contingent predictions -- a long way off from forecasting.

There is plenty wrong with the way that economists have behaved in the run-up to the financial crisis without ascribing such grandiose claims to economics. 

My take is that you should blame economists, not economics:      

The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful.

They forgot that there were many other models that led in radically different directions. Hubris creates blind spots. If anything needs fixing, it is the sociology of the profession. The textbooks -- at least those used in advanced courses -- are fine.

Non-economists tend to think of economics as a discipline that idolizes markets and a narrow concept of (allocative) efficiency. If the only economics course you take is the typical introductory survey, or if you are a journalist asking an economist for a quick opinion on a policy issue, that is indeed what you will encounter. But take a few more economics courses, or spend some time in advanced seminar rooms, and you will get a different picture.

Labor economists focus not only on how trade unions can distort markets, but also how, under certain conditions, they can enhance productivity. Trade economists study the implications of globalization on inequality within and across countries. Finance theorists have written reams on the consequences of the failure of the “efficient markets” hypothesis. Open-economy macroeconomists examine the instabilities of international finance. Advanced training in economics requires learning about market failures in detail, and about the myriad ways in which governments can help markets work better.

Macroeconomics may be the only applied field within economics in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigor. Sadly, in view of today’s needs, macroeconomists have made little progress on policy since John Maynard Keynes explained how economies could get stuck in unemployment due to deficient aggregate demand. Some, like Brad DeLong and Paul Krugman, would say that the field has actually regressed.

Economics is really a toolkit with multiple models – each a different, stylized representation of some aspect of reality. One’s skill as an economist depends on the ability to pick and choose the right model for the situation.

Economics’ richness has not been reflected in public debate because economists have taken far too much license. Instead of presenting menus of options and listing the relevant trade-offs – which is what economics is about – economists have too often conveyed their own social and political preferences. Instead of being analysts, they have been ideologues, favoring one set of social arrangements over others.

Furthermore, economists have been reluctant to share their intellectual doubts with the public, lest they “empower the barbarians.” No economist can be entirely sure that his preferred model is correct. But when he and others advocate it to the exclusion of alternatives, they end up communicating a vastly exaggerated degree of confidence about what course of action is required.