In this book Dani Rodrik brings together a group of previously published essays to present a forceful elaboration both of his criticisms of the policy approach to economic growth in developing countries known as ‘the Washington consensus’ and a detailed description of the policy approach he favors to foster development. Policies promoted by the World Bank, the International Monetary Fund, and the US Treasury Department emphasizing the primacy of minimizing government interventions in promoting economic development and instead relying on the functioning of free markets characterize the Washington consensus. For example, such specific policies as privatization, trade liberalization, openness to direct foreign investment, fiscal discipline, sound monetary policies, deregulation, and secure property rights have long been advocated by these institutions. Moreover, over time the list has been expanded to emphasize such factors as the need for good governance and the development of institutions promoting economic stability and providing social safety nets.
In appraising the Washington consensus, Rodrik makes a sharp distinction between what he describes as ‘the higher-order principles of neoclassical economics’ that underlie all successful development efforts and the specific policies advocated under the Washington approach. At the microeconomic level these higher-order principles cover property rights that ensure that investors can retain the returns to their investments; introducing producer incentives that are consistent with social costs and benefits; the provision of a transparent, stable and predictable set of legal rules; and the existence of social safety nets to facilitate economic adjustments. At the macroeconomic level they include sound monetary policies that do not generate liquidity beyond the growth in nominal money demand at reasonable inflation; fiscal sustainability that ensures the public debt remains reasonable; and prudential regulations that prevent the financial system from taking excessive risk. Rodrik maintains that ‘while this particular reform program [the Washington consensus] represents a logically consistent way of achieving these goals, it is not the only one that has the potential of doing so. In fact, in view of the administrative and political constraints that such an ambitious agenda is likely to encounter, there may well be better ways of getting there’ (pp. 22–23). The key idea is that these first-order economic principles do not map into particular policy packages and that reformers have considerable room for designing policies that are sensitive to local opportunities and constraints.
In support of this view, Rodrik cites the successful development efforts of such countries as China, South Korea, Taiwan, and Japan that were based on a much greater interventionist role for the national government than envisioned in the Washington-consensus approach. He also points to the experience in Latin America where extensive market reforms consistent with Washington consensus were carried out but sustained development failed to take place.
To ignite economic growth, Rodrik advocates focusing on a limited set of reforms that are aimed at eliminating binding constraints to economic activity but do not overly strain a country's existing institutional capacity. Identifying these constraints involves a diagnostic analysis that first identifies which of three growth determinants, namely, low returns to accumulation, poor appropriability of these returns or too high a cost of finance and then uncovers the specific distortions that lie behind the most severe constraints. Just how this framework can be applied in practice is illustrated by a detailed analysis of the growth constraints of Brazil, El Salvador, and the Dominican Republic.
Rodrik stresses that sustained development is likely to be more difficult to achieve than igniting it. Sustained growth requires the construction over the longer term of an institutional structure that can continue to find and eliminate binding constraints and maintain productive dynamism. In his view, relying on market forces to achieve sustained growth is not necessarily enough. These forces must be complemented by proactive public policies, in particular industrial policies and efforts to strengthen domestic institutions of conflict management. Illustrative industrial policies include subsidies to offset the uncertainties about what new products can profitably be produced, the provision of investment funds by governments to carry out these projects, publicly funded R&D efforts, and subsidized technical training.
Although the tone in Rodrik's essays is highly critical of orthodox development policy, the substance of his main points does not seem to differ that much from this policy. The most important area of agreement is that sustained growth requires such conditions as secure property rights, a predictable legal system, producer incentives consistent with social costs and benefits, sound money, and fiscal sustainability. He also agrees that the policies of the Washington consensus are consistent with the promotion of these conditions. But he believes there are alternative policies for promoting these conditions in developing countries that involve a greater role for the government.
Interestingly, some of the countries, e.g. Taiwan and South Korea, that Rodrik points to as illustrating successful development through government-directed industrial policies are the same ones that other economists point to as illustrating the successful development with Washington-consensus type policies. The latter group emphasizes such factors as the turning away by these countries of import-substitution policies and the adoption of sound monetary and prudent fiscal polices. The industrial policies adopted by these countries tend to be regarded as measures that either helped to remove existing economic distortions or actually slowed economic growth. Unfortunately, we do not seem to have sufficient data to distinguish definitely the relative importance of these two approaches in contributing to sustained economic growth.
As Rodrik points out, arguments against industrial polices are that they are prone to political capture and corruption and that governments are not very good at picking economic winners. However, he believes there are good counterarguments against these points. While it seems to this reader that he fails to present a convincing case for the extensive use of industrial policies to promote long-run growth in developing countries, the thoughtful and scholarly elaboration of his pro-industrial policy views in this book should be essential reading for all interested in stimulating growth in these countries.
