Rodrik’s Diagnostics

Mr. Sta. Ana coordinates Action for Economic Reforms. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, April 17, 2006 edition, page S1/5.

It is rare for great contemporary economists to visit the Philippines and give lectures.

The Nobel laureate, Joseph Stiglitz, is exceptional, having visited the country thrice during and after his stint as the World Bank’s chief economist.  Stiglitz loves to reach out to different audiences, including those who are outside the mainstream of economic thinking.  He goes out of his way to talk to non-governmental organizations.  Action for Economic Reforms has had the privilege of hosting some of Stiglitz’s lectures in Manila.

A more recent visitor to Manila is Dani Rodrik, a professor of International Political Economy at the John F. Kennedy School of Government, Harvard University.  Sponsored by the Asian Development Bank (ADB) under its Distinguished Speaker’s Program, Rodrik gave a lecture at the ADB headquarters on 31 March 2006 titled “Development Lessons for Asia from non-Asian Countries.”

Rodrik, a Turkish-American born in Istanbul, is in his late forties—a relatively young age for an economist whose many writings have significantly contributed to economic theory and policy.  His published works—books, monographs, journal articles—number more than a hundred, not counting non-academic papers and unpublished ones. Many of his articles—on growth, trade, economic integration, industrial and technology policy, institutions, economies in transition—are widely cited by his peers as well as by non-economist scholars from the social science disciplines.

In the Philippines, Rodrik has a following in the academe.  Raul Fabella, the dean of the University of the University of the Philippines School of Economics, has a handy diskette filled with Rodrik papers.  Michael Alba, the dean of De La Salle University’s College of Business and Economics, has been hoping against hope to invite Rodrik to be the guest speaker at the forthcoming conference of the Philippine Economics Society. Filipino economists, most of them pro-liberalization, are eager to hear Rodrik, the contrarian.

Stiglitz and Rodrik have common views regarding globalization (to be precise, economic integration). In gist, they say that the “rules of thumb” (the standard recipe of liberalization) do not usually work.  In the same vein, countries that break “the rules of thumb” are the most successful in achieving sustained growth and rising living standards.

The first time I heard Rodrik speak was in a 2002 conference in Washington DC about alternatives to neo-liberalism.  Mr. Rodrik’s lecture focused on the failure of the standard prescription of liberalization embodied in the Washington Consensus.  Using a metaphor, he said that the main lesson for developing countries is to “march to the beat of their own drums.”  In other words, the successful reforms are “country-specific” and “context-specific,” involving a narrow set of unconventional interventions.

In the ADB lecture, he reiterated his core argument: The conventional wisdom of the Washington Consensus—simultaneous, comprehensive reforms focused on liberalization, deregulation and privatization—has been discredited. “The countries that took the Washington Consensus to heart have experienced lagging growth rates.”  Together with the Caribbean, Latin America countries, the most ardent disciples of the Washington Consensus, had an average growth rate of only one percent from 1990 to 2003.  On the other hand, those countries that posted sustained high growth rates in the 1990s such as China Viet Nam and India “played by different rules.”

To illustrate, China had an average growth rate of 7.1 percent in the 1990s; yet, it had non-tariff barriers and its average tariff rate was 31.2 percent in the early and mid-1990s.  Vietnam’s average growth rate for the same period was 5.6 percent.  Its tariffs ranged between 30 percent and 50 percent.  India’s average growth rate for this period stood at 3.3 percent at a time that its tariffs averaged 50.5 percent.   Hence, we can draw a conclusion that sustained high levels of growth for developing countries do not correlate with trade liberalization.  In Rodrik’s words, trade liberalization does not provide an “unambiguously positive response.”  Incidentally, and ironically, despite their high tariff regimes, China, Viet Nam and India have been packaged as globalization’s “poster boys.”

Despite the empirical evidence showing the Washington Consensus’s failure, some prominent mainstream economists still insist on its correctness.  Rodrik cites two typical reactions. The first reaction argues that the Washington Consensus “was not really tried.” Former International Monetary Find chief economist Anne Krueger, more known for her seminal work on rent-seeking, once said:  “Meant well, tried little, failed much.”{mospagebreak}

Precisely, many countries had to compromise, if not abandon, the Washington Consensus prescriptions, because they were costly and difficult to implement. The Krueger argument is similar to the logic of the unrepentant communist ideologues who forcefully argue that the collapse of Soviet Union’s socialism was the result of deviation from Leninist principles.

The other reaction is that “there was no failure,” as typified by this statement from former Treasury chief and former Harvard president Lawrence Summers:  “I would suggest that the rate at which countries grow is substantially determined by three things: their ability to integrate with the global economy through trade and investment; their capacity to maintain sustainable government finances and sound money; and their ability to put in place an institutional environment in which contracts can be enforced and property rights can be established. I would challenge anyone to identify a country that has done all three of these things and has not grown at a substantial rate.”

Summers’s uncontroversial statement does not illumine. It contains high-level abstractions but does not offer how such principles can be achieved.  To quote Rodrik, it “is devoid of operational implications….And if we try to give it operational content, it turns out that the immediate implications are not quite consistent with the evidence.”

One can argue that China and Viet Nam put in place the incentive structure that objectively respects property rights even though private property is almost absent in these communist-governed countries.  China, Viet Nam and India gained from globalization through a strategy that included high tariff barriers and capital controls. On the other hand, the economies of Latin American countries stagnated at a time that governments embraced the Washington Consensus program of low tariffs, free movement of capital, low public sector deficits, inflation targeting. etc.

The most refreshing and most illuminating part of Rodrik’s presentation was his growth diagnostics as the alternative to the Washington Consensus.  A diagnostics approach in crafting a growth strategy is akin to what Leninists call a “concrete analysis of concrete conditions.”  With the aid of a problem tree, the diagnostics approach scans and assesses the different problems affecting investment and entrepreneurship.  Then, it narrows the problem set, identifying the principal binding constraints on growth.  It is similar to Josef Stalin’s concept of the “key link.”   Focus on the key problem(s), their resolution will have a decisive, catalyzing impact on the whole economy.

The diagnostics approach thus rejects a comprehensive, uniform menu of reforms a la Washington Consensus.  It is, as Rodrik says, “inherently bottom-up, empowering countries to do their own analyses.”  The diagnostics can lead to addressing unique country-specific problems, and the instruments to be used can likewise be novel and innovative.

The challenge is how to apply diagnostics framework and process to the Philippine context.  The process is stimulating and demanding. Getting the priorities is not an easy task, given the complexity of the country’s binding constraints. There is low return to economic activity because of government and market failures.  Social returns are low because of poor infrastructure and the declining quality of health and education.  Producers, especially in agriculture, suffer from high financing costs. The list goes on.

Michael Alba tried to apply the diagnostics approach, and he told me that the main binding constraint in the Philippines is the low total factor productivity (TFP).  Yet, the next question is how to decompose and analyze the components of TFP.  TFP is a function of many factors, including politics.

Be that as it may, Rodrik’s views have inspired Filipino economists to think differently.  Who knows, the diagnostics test might lead to a discovery of a not so unusual binding constraint—an economist “President” whose legitimacy is under doubt and who does not listen to advice because she thinks she is infallible.

No comments yet.