Rodrik on The Myth of Authoritarian Growth

I really agree with Dani's great article on this (HT Chris Blattman).

When we look at systematic historical evidence... we find that authoritarianism buys little in terms of economic growth. For every authoritarian country that has managed to grow rapidly, there are several that have floundered. For every Lee Kuan Yew of Singapore, there are many like Mobutu Sese Seko of the Congo.

Democracies ... provide much greater economic stability, measured by the ups and downs of the business cycle. They are better at adjusting to external economic shocks (such as terms-of-trade declines or sudden stops in capital inflows). They generate more investment in human capital – health and education. And they produce more equitable societies.

Authoritarian regimes, by contrast, ultimately produce economies that are as fragile as their political systems....

At first sight, China seems to be an exception. ... Even though it has democratized some of its local decision-making, the Chinese Communist Party maintains a tight grip on national politics and the human-rights picture is marred by frequent abuses.

But China also remains a comparatively poor country. Its future economic progress depends in no small part on whether it manages to open its political system to competition, in much the same way that it has opened up its economy. Without this transformation, the lack of institutionalized mechanisms for voicing and organizing dissent will eventually produce conflicts that will overwhelm the capacity of the regime to suppress. Political stability and economic growth will both suffer.

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Response to Dani Rodrik on Washington Consensus

Dani gives a response to some “counter-arguments” against his post favoring Import-substituting Industrialization (ISI) over Washington Consensus (WC) that had mysteriously “resuscitated” themselves after they “had long been laid to rest.” I appreciate Dani’s courtesy in not identifying the culprits in this misguided resuscitation of long-dead counterarguments, but it does make it a little difficult to carry on a precise debate. It’s possible that my post about skill vs. luck, and the comments that followed, may have been one of the culprits (fitting the theme of that post, this can only be a probability rather than a certainty). Anyway, assuming that my post and ensuing comments was partly to blame (and thanks to Chris Blattman for a more favorable review), Dani does not have time in his short post to get to the crucial arguments. His original post was too vague about the timing and identification of just who had ISI and who had WC and when, and so what growth experiences to attribute to each, and whether to control for the overall fall in average growth of ALL countries in the world from the ISI to the WC period. And in Dani’s new post, we also have the third category of policy regime “unorthodox but well-targeted reforms” (UBWTR?) for Asian countries. And to test a hypothesis that growth under one regime is higher than under another, you have to calculate standard errors reflecting noise in the growth rate (affectionately called “luck,” which standard errors I and others have shown are large), you cannot dismiss standard errors with a quip about “the check is in the mail.” Most attempts to sort all that out have not been very successful or conclusive, which is why economists started saying things like:

the experience of the last two decades has frustrated the expectations …{that} we had a good fix on the policies that promote growth.

I will acknowledge from whom I think I absorbed this valuable cautionary statement. I am pretty sure it was from a 2005 article by a certain D. Rodrik (ungated version here, official version here).

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Dani Rodrik's pessimism on democracy: let the debate begin!

Dani has been dropping tantalizing hints about his forthcoming book. One of his arguments, as judging by the preview in his column on the Greek crisis, is the political trilemma: Democracy, globalization, the nation state are not mutually compatible, you can only pick 2 out of 3.

I look forward to the book for the detailed logic and evidence. Of course, skepticism is allowed already, since Dani's already put it out there and since the burden of proof is on the proponent of a new hypothesis. So far I have 2 big reasons for skepticism:

(1) exaggerating the constraints of globalization.

Dani has a much more respectable version of this than Tom Friedman's ridiculous "golden strait jacket," but the reason for doubt are the same: we do observe a lot of diversity of policies in the rich globalized economies, and they became rich all the same.

(2) over-predicting the demise of either democracy or good economics

There's a long history of arguments about why democracy is incompatible with good economics that benefits everyone. Either the masses will vote to expropriate the capitalists, or the capitalists will use their wealth to buy votes to get power to exploit the masses. Neither happened in capitalist democracies (maybe the two threats cancel each other out).

So I am skeptical about the Rodrik Trilemma, but maybe the book will provide some convincing arguments. Can't wait!

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Dani Rodrik's unexpected personal insight into the Turkish political crisis

Certainly one would expect Dani Rodrik on his blog to have some inside knowledge on the confusing "military coup plot" trials in Turkey -- who are the good guys and who are the bad guys? But he has even more inside knowledge than you think: as he reveals in Foreign Policy, one of the generals arrested is his father-in-law.

Condolences to Dani and his family, and here's hoping justice and democracy prevail.

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How ethnic profiling explains Dani Rodrik’s fondness for industrial policy

Airline passengers recently ejected an innocent Muslim family from an airplane because they were afraid the family were terrorists. Similar reasoning explains why Dani Rodrik favors industrial policy as a key to success. Before getting overly critical of Dani, whom I admire a lot, let me confess I have frequently committed the same type of reasoning error myself, and so does virtually everyone else. But it’s still wrong.

All of us are making the amazingly common mistake of REVERSING CONDITIONAL PROBABILITIES. The airline passengers perceived from media coverage that the probability that IF you are a terrorist, THEN you are a Muslim is high. Unfortunately for the poor family, the passengers confused this with the relevant probability, which is the chance that IF you are a Muslim, THEN you are a terrorist (which is extremely low even if the first probability really is high, because terrorists are very rare).

So here is Dani Rodrik on success and industrial policy: “the countries that have produced steady, long-term growth during the last six decades are those that relied on a different strategy: promoting diversification into manufactured … goods” (cited in Economist’s View).

So Dani concludes, “What matters [for growth in developing countries] is their output of modern industrial goods” and that developing countries will have to get busy with “real industrial policies.” Finally, “external policy actors (for example, the World Trade Organization) will have to be more tolerant of these policies.”

Unfortunately, Dani is also REVERSING CONDITIONAL PROBABILITIES. Dani’s evidence is based on what he believes is the high probability that IF you have had steady growth for six decades, THEN you had industrial policy. This is interesting, but this is not the right probability in deciding whether to choose industrial policy, which is “IF you have industrial policy, THEN what is your chance of steady growth for six decades?”

This second, correct, probability would seem to be pretty low, since many other countries -- especially African and Latin American -- extensively tried industrial policies over the past six decades with low and erratic growth as a result. Attempts at forcing investments into industrialization led to a huge pileup of debt in Latin America in the 1970s, which erupted into a debt crisis in 1982 and subsequent lost decades, when the productivity of the investments proved to be low. The more extreme results in Africa include the Ajaokuta steel mill in Nigeria which went through $6 billion but never produced a bar of steel, or Tanzanian manufacturing, which had NEGATIVE growth of output per worker despite heavy capital investments. (For more on this see this paper.)

I am really going through a MAJOR Mlodinow slash Kahneman phase about how economists (present company included) misinterpret data. To all of you who I am tormenting with this stuff, I promise to move on to something more constructive soon, like maybe another edition of our popular series Notes from the Field.

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Why So Scared of “Free Markets”?

The debate of the last few days on this blog reminded me again of how strong is the visceral negative reaction to an argument for “free markets” (those dreaded words are practically an epithet by now) in development. Part of this may be justified; let’s explore this in a Q and A. Q. Isn’t the case for markets a purely ideological one, which just serves to protect the interests of the rich?

A. True, it often has been. There is an ideological camp that will twist evidence to support free markets. They overpromise on how soon and how much development "markets" will deliver. They coerce other countries to accept "markets," bypassing the democratic process, which leads to a xenophobic backlash. And some in this camp do just want to defend the rich against ANY policy that hurts the rich even if it is a “free market” policy, so some are hypocritical.

However, beware of the fallacy called “Affirming the consequent.” If you are a Nazi, Then you like Wagner’s operas. It does not follow that: If you like Wagner’s operas, Then you are a Nazi. Similarly, suppose we agree: If you are a free market ideologue, Then you will defend free markets. However, it does not follow that If you defend free markets, then you are an ideologue. My posts presented evidence for markets as a development strategy. Feel free to disagree with the evidence, but don’t jump to the “ideologue” conclusion (see earlier blog discussion of how “ideologue” accusations are used as trump cards to try to win an argument).

Q. Don’t defenders of markets understand the role of the government to provide public goods, like institutions and infrastructure?

A. Yes, of course they do. The frequency with which this question comes up itself illustrates the strength of the negative reaction to pro-market arguments. Is it really likely that a Ph.D. economist would never have heard of public goods?

Q. So why criticize the Rosenstein-Rodan 1943/Collier and Unido 2009 argument for state-led industrialization?

A. These arguments argue for an industrialization “poverty trap” because of increasing returns in industry, which requires vigorous state “coordination and planning” in the poorest economies to escape. This is way beyond the “state covers public goods, market covers private goods” consensus of mainstream economics. In development, there were many attempts at force-fed industrialization based on this constantly-recycled idea (especially Africa, Middle East, and Latin America), which failed. Historically, industrialization arose in initially poor countries which have since become rich, with the common theme a heavy reliance on both domestic and international market opportunities and decentralized private entrepreneurship. First, we had UK, US, the rest of Western Europe, Australia, New Zealand, then Japan, then late industrialization in the European periphery (Ireland/Greece/Spain/Portugal), East Asian Gang of Four, and most recently China and India. Some of these cases had some kinds of industrial policies in common with the failures mentioned above, but they also had a heavy reliance on markets in common with other successes, to pass the ultimate verdict on scaling up successes. If you have a successful case that follows both policies A and B, and A has a record of success elsewhere and B has a record of failure elsewhere, shouldn’t you give more credit to A than B for the success of this case?

Q. What about Dani Rodrik’s questioning of the Jong-Wha Lee results on the negative effects of Korean industrial policy?

A. Dani, You are right to call me on this when I have other papers scornful of identifying policy effects from cross-country growth regressions. I thought the Lee paper deserved a little more consideration because it was NOT a typical cross-country regression; it was such a rare attempt to study within-country and cross-period effects of a policy regime, it had a parsimonious specification that alleviates the usual concerns about data mining; and and in particular it is even more rare to do all this to systematically test Korean industrial policy variations across period and industry. Lee’s systematic empirical approach contrasts with the anecdotal quality of most discussions of Korean industrial policy. Another paper by E. Kim in JDE in 2000 tends to confirm Lee’s results on Korean cross-time, cross-sector variations in response to industrial trade policies. Beason and Weinstein had a 1996 paper in RE Stat that also questions the conventional wisdom about positive effects of industrial policy in Japan.

Q. But hasn’t the current crisis discredited “free markets”?

The history of markets is one of periodic crises (especially financial crises) and recoveries, including major episodes of creative destruction, but with steady positive long run growth despite severe fluctuations around the trend. The huge fallibility of human actors makes the case for markets stronger, not weaker. The market itself triggers the corrective actions by both public and private actors when these actors do stupid things, like give too many mortgages to people who were not creditworthy and then try to cover it up with fancy securitization. The collapse of financial markets was a severe wake up call to change this stupid behavior; creative destruction is wiping out firms that made huge mistakes (despite some well-publicized cases of individual CEOs getting bonuses despite their stupid actions). New firms or restructured firms will not make the same mistakes (even if they find new mistakes to cause some new crisis). Since we recovered from all the previous crises of capitalism, it seems likely we will recover from this one. A knee-jerk rejection of markets (especially in poor countries) will likely postpone rather than accelerate the recovery, which made the anti-market arguments of the Collier/UNIDO report particularly ill-timed.

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