Rodrik: economic growth requires political change

Dani Rodrik’s new paper, “The Future of Economic Convergence” (PDF), is fascinating on many levels, but in this self-serving post I just want to highlight his affirmation of the central thrust of my blog, from page 34 of the paper:

…creating well-functioning market economies requires considerably more than tinkering with specific policy instruments. It is a process that involves deeper institutional transformation measured in decades rather than years. Laws and regulations can be rewritten quickly, but that is not by and large where a nation’s institutions reside. The rules of the game that we call “institutions” are cognitive constructs that shape expectations about how other people behave (North 1990, Pistor 2000). These expectations are difficult to modify and replace, short of wars, occupation, revolutions, or other cataclysmic events. Furthermore, as long as the beneficiaries of the established order remain politically strong, they can easily circumvent reforms that undercut their privileges. As Daron Acemoglu and James Robinson have emphasized in their various writings, sustainable economic growth ultimately requires political change (Acemoglu and Robinson, forthcoming). [emphasis added]

This paragraph rests on two important assumptions, both of which Rodrik makes explicit in his paper. First, Rodrik asserts that a country needs well-functioning markets to be able to sustain economic growth. I’m enough of a capitalist to accept this premise without much complaint. Second, and more interestingly, he makes the case that manufacturing industries are driving the economic convergence between the developed and developing world. (Importantly, he qualifies that while this convergence is happening, global inequality is still a major problem.) His emphasis on manufacturing is well-timed, as the New York Times Magazine recently published a long article titled, “Does America Need Manufacturing?”

A final point of interest is that Rodrik expects the current global economic crisis to intensify institutional opposition to the tools that developing countries can use to develop their manufacturing base. From page 5:

…low growth in the rich countries creates a difficult external environment for the conduct of structural transformation policies in developing economies. Policy makers in the U.S. and Europe have long stopped viewing subsidies and overvalued currencies in developing nations with benign neglect. With unemployment stuck at high levels and the economy stagnating, such policies are likely to attract even more vociferous opposition. Greater push-back from the IMF and the WTO on industrial policies and “currency manipulation” is to be expected. [emphasis added]

The implicit assumption is that at institutions like the IMF and WTO, the interests of the developed world trump those of the developing world. That’s hardly a groundbreaking assertion, but the implications go well beyond the “conventional wisdom,” as it were, about these institutions.

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