Appraising a post-Washington paradigm: What Professor Rodrik means by policy reform

ABSTRACT

This essay critically reviews an important new school of thought in the ‘post-Washington’ era, that of Professor Dani Rodrik and his collaborators. The review first provides some background on the substantive differences between the Washington Consensus and more heterodox development paradigms, such as Robert Wade's East Asian revisionism. The paper then outlines Rodrik's own developmental vision, which could be termed a third way inasmuch as it borrows elements from both orthodox and heterodox schools of thought, yet disagrees with some of the central underpinnings of both. The remainder of the paper then critically assesses some key elements of this alternative vision, especially Rodrik's institutionalist revision of the existing growth evidence, his call for greater democratization as a universal institutional reform and his proposed changes to the way in which technocrats should formulate policy advice in a post-Washington era.

KEYWORDS:

• Washington Consensus
• growth strategies
• revisionism
• institutionalism

Notes

^a The ‘Original Washington Consensus’ refers to Williamson's (1990) original ten-point agenda, not to the subsequent augmentation of this list which Rodrik has termed The Washington Consensus Mark II;

^b Wade is also skeptical that it is feasible to define competitive exchange rates via theoretical means, and skeptical that free markets will achieve competitive rates.

^a The World Bank and IMF do not have mandates to intervene in the political processes of their client countries, so this criterion only relates to US government institutions;

^b Examples of Washington policy makers favoring discretion which are listed in Williamson (1990) include: fiscal deficits constrained by debt to GDP ratios, the removal of import licenses and highly differential tariff structures, a preference for floating exchange rates over discretionary systems, preferences for privatization over public management and concerns that government regulation breeds corruption;

^c This is based on a personal communication with Robert Wade, not on a direct reading of Governing the Market.

¹ The specific ten points of the Washington Consensus are discussed in more detail in Section 3 (see Table 1).

² Many critiques of the Washington Consensus are listed below, but good reviews can also be found in Gore (2000) and Onis and Fikret (2005). Moreover, the breadth of opposition to the Washington Consensus, even amongst elite economists, is amply demonstrated by the so-called Barcelona Consensus. In September 2004, 16 well known economists – Olivier Blanchard, Guillermo Calvo, Daniel Cohen, Stanley Fischer, Jeffrey Frankel, Jordi Galí, Ricardo Hausmann, Paul Krugman, Deepak Nayyar, José-Antonio Ocampo, Dani Rodrik, Jeffrey Sachs, Joseph Stiglitz, Andrés Velasco, Jaime Ventura and John Williamson – gathered in Barcelona, Spain, and, as a result of their meetings and deliberations, issued a document containing a new post-Washington consensus on growth and development.

³ Professor Rodrik has been an invited speaker at a range of prestigious events, including the WIDER Annual Lecture (November 2004), the Alfred Marshall Lecture of the European Economic Association (August 1996), and the Raul Prebisch Lecture of UNCTAD (October 1997). He was also the 2007 recipient of the Albert O. Hirschman award.

⁴ The research team on this report consisted of J. Edgardo Campos (Chapter 9), James Hanson (Chapter 7), Ann Harrison (Chapter 5), Philip Keefer (Chapter 10), Ioannis Kessides (Chapter 6), Sarwar Lateef (Chapter 9), Peter Montiel (Chapter 4), Lant Pritchett (Chapters 2 and 8 and country notes), S. Ramachandran (Chapters 6 and 7 and country notes), Luis Servén (Chapter 4), Oleksiy Shvets (Chapter 3 and country notes), Helena Tang (Chapter 5) and Roberto Zagha (Chapter 1 and country notes). Major contributions were also made by Ihsan Ajwad, Takako Ikezuki, Richard Messick and Shilpa Pradhan. Peer reviewers were Rui Coutinho, Ricardo Hausmann, Ravi Kanbur and Devesh Kapur.

⁵ See < http://ksghome.harvard.edu/~drodrik/Growth_Diagnostics_Index.html > for a list of papers, while < http://www.treasury.gov.za/publications/other/growth/default.aspx > lists the paper on South Africa's growth diagnostic.

⁶ Readers may be inclined to question whether Rodrik himself is not better placed to outline this coherence. Of course, Rodrik's individual works often self-reference, but these alone do not provide a complete depiction of the linkages between his various arguments. Also, Rodrik's recent book (Rodrik, 2007b) is actually just a collection of his past essays, rather than a synthesis of his various arguments. Nevertheless, we encourage readers to read the introduction to that text, which does provide an interesting discussion of his general position on some of the issues outlined above.

⁷ It is difficult to ascribe the Washington Consensus to particular academic economists – except for the one who coined the term, albeit in a review/ synthesis piece (John Williamson) – because this paradigm largely involves policy makers as much as it does academic researchers. However, leading neoclassical economists of the time include Anne Krueger (formerly the World Bank's Vice President for Economics and Research (1982–1986), and later First Deputy Managing Director of the IMF (2001–2006), T. N. Srinivasan, Deepak Lal and Bela Balassa (both briefly associated with the Bank at some stage or another), while the famous Berg report of 1981 is often seen as a landmark Washington Consensus publication. Influential neoclassical economists of the 1970s and 1980s include Harry Johnson, P. T. Bauer and Jagdish Bhagwati.

⁸ Prominent heterodox economists of earlier years included Gunnar Myrdal, Irma Adelman, Paul Streeten, Hans Singer, Albert Hirschman, Raul Prebisch, among others. Alice Amsden's work on South Korea was also influential in more recent times, as was Wade's on Taiwan. The more contemporary institutionalist work of Douglas North also involves some rejection of neoclassical tenets, such as perfect rationality, and more strongly emphasizes the importance of formal institutions, such as property rights, but also informal institutions, such as norms (Denzau and North, 1994). Ha-Joon Chang has written quite a critical examination of globalization (Chang, 2006). It would also be fair to say that the UN has generally sponsored more heterodox thinking on development, as compared to the World Bank or IMF, as evident in the annual Human Development Reports of the United Nations Development Programme, as well as the various reports of the specialized agencies, such as United Nations Conference on Trade and Development (UNCTAD) and the International Labor Organization (ILO).

⁹ Professor Wade's views on decentralization are not directly based on statements in Governing the Market, but are instead based on personal communications with the author.

¹⁰ For example, see Greenwald and Stiglitz, 1993, 2006; Greenwald et al., 1984; Stiglitz, 1982, 1993, 1994, 1999.

¹¹ In this, Rodrik's critique of post-Washington Consensus strategies, such as the Millennium Development Goals, bears some similarity to William Easterly, although he is not quite as sanguine as William Easterly is as to the role of foreign aid. Some discussion of differences between Rodrik, Stiglitz and Easterly can be found on Rodrik's own blog at < http://rodrik.typepad.com/ >.

¹² By ‘mainstream economics’ Rodrik appears to refer to both neoclassical and institutional economists, and probably Keynesian economics as well, although it is debatable whether all of these schools are sufficiently compatible with each other to be grouped under such a broad umbrella.

¹³ How to implement such principles in practice is less well understood, but Rodrik does try to tackle this issue, as we discuss below.

¹⁴ For example, Sachs makes little or no mention of industrial policies and is generally regarded as a free trade advocate. Stiglitz's emphasis on industrial policies has always been heavily qualified (see, for example, the World Bank (1993) report on the East Asian miracles, which was written by a research team of which he was a key member, as well as Stiglitz (1998)). William Easterly (2006) also advocates restricting foreign aid to funding entrepreneurs, but Rodrik favors a much more state-led approach, closer to East Asia's industrial policies. This puts him much closer to Wade and other East Asian revisionists than other mainstream economists.

¹⁵ By ‘direct’ obstacle, Hausman et al. (2006) refer to distortions that have the largest direct effects on growth, where indirect effects refer to the effects that removing this distortion will have on other distortions in the economy, which may be positive or negative. Thus there is no guarantee that their strategy will be welfare improving, but they maintain that removing large direct distortions seems the safest way to proceed in the absence of perfect knowledge of the strength and direction of indirect effects, and in the presence of limited technical and political capability to address all constraints simultaneously.

¹⁶ Rodrik's (1990) primary concern over that sort of gradualism is that it sends uncertain signals to private investors, and may therefore undermine government credibility and inhibit responses from the private sector. In a personal communication, Professor Rodrik pointed out that this review had perhaps not given full consideration to the evolution of his thinking over time. In this particular case reference has been made to a paper published in 1990, which was surely written before the disastrous outcomes of shock therapy in Eastern Europe. Professor Rodrik's thinking on the issue of gradualism may therefore have changed somewhat over time. See, for instance, his discussion of gradualism in Note 4. What is interesting is that the seeds of the growth diagnostic approach are clearly evident in the 1990 paper referred to above; e.g. ‘reform in a narrow range of policies’.

¹⁷ I am actually indebted to Robert Wade for this astute observation.

¹⁸ Several of Rodrik's earliest works already dealt with precisely these issues at around the same time as Amsden and Wade were writing (Rodrik, 1986, 1987, 1988, 1989, 1994), although these studies were not quite as detailed or extensive as Amsden's and Wade's analyses. We also note an affinity between Rodrik's methodological critique of the work on trade and growth (Rodriguez and Rodrik, 2001) and Wade's critique of similar evidence a decade earlier (see Chapter 1 of Wade (1990): 15–22).

¹⁹ Adelman and Morris (1967, 1988, 1997) heavily emphasized ‘alternative development paths’ from the 1960s onward, albeit based on cross-country econometric techniques. Robert Wade makes some very similar conclusions on the non-equivalency of neoclassical theory and neoclassical policies in Governing the Market, as does Stiglitz (1994) in Whither Socialism?.

²⁰ The same type of critique could be applied to many other inductively derived conclusions in this literature. Countries engaged in diverse industrial policies, some being associated with industrial success (East Asia) and others with industrial failure (e.g. Latin America). The literature has looked for differences in the industrial strategies of these countries – such as discretion- versus rules-based regimes, or whether the carrot was accompanied by the stick – but without much in the way of definitive conclusions. Compare Rodrik (1995b) to the World Bank (1993), for example.

²¹ There are, again, close affinities in this context with other strands of the institutionalist literature. Humility, pragmatism and interdisciplinary diagnostism are all features of growth strategies advocated by earlier institutionalists (Adelman and Morris, 1967; Myrdal, 1968). In the case of Myrdal (1968), see Appendix II, much of which was authored by Paul Streeten.

²² In a response to Easterly's critique of the Millennium Development Goals, Sachs writes: ‘Easterly's call to do things piecemeal is vacuous. Shall we do vaccinations this decade, AIDS control the next, malaria control in the 2020s, clean drinking water in the 2030s, and food production in the 2040s? There is no reason why we can't help poor countries to invest in clinics, schools, roads and improved farms during the next 20 years’ (Sachs, 2005b: BW12).

²³ Indeed, even in the Latin American context which Hausman et al. (2006) examine, it may be argued that it is very difficult to address growth issues without addressing the significant inequality in much of that continent. Rodrik's own work is reasonably supportive of this statement (Alesina and Rodrik, 1994).

²⁴ In the preface to the World Bank's Economic Growth in the 1990s report, the World Bank Vice President who oversaw the report (Gobind Nankani) states that ‘[W]e need to get away from formulae and the search for elusive “best practices”…’.

²⁵ Successful policy adaptation is also an implicit feature in much of Rodrik's earlier work on trade and industrialization strategies. For example, Rodrik's ‘Taking Trade Policy Seriously: Export Subsidization as a Case Study in Policy Effectiveness’ (1995b) explicitly tries to discern best practice export subsidization policies. As one might expect of Rodrik, however, this paper is not over-ambitious in selling a ‘best practice’.

²⁶ ‘In policy circles, the discussion on the relationship between political regime type and economic performance inevitably gravitates toward the experience of a handful of economies in East and Southeast Asia’ (Rodrik, 2000b: 21).

²⁷ This unequal treatment of Asia's economic and political experiences – which can be broadly summarized as high growth, pro-poor and authoritarian – stands in marked contrast to Wade's (1990) analysis, which places considerable emphasis on the political components of East Asia's success (see Table 2).

²⁸ Persson and Tabellini (2006a, b), for example, have suggested that reforms into parliamentary (as opposed to presidential), proportional (as opposed to majoritarian) and permanent (as opposed to temporary) democracy, as well as countries with longer histories of democratic experience, are all factors that appear to produce the most growth-promoting policies. Moreover, there may be asymmetries between democratization and ‘autocratization’. Persson and Tabellini (2007) find that whilst democratization may not produce much of a growth effect, switching from democracy to autocracy substantially reduces growth rates. And Giavazzi and Tabellini (2005) find that the sequence of economic and political reforms is crucial: countries liberalizing their economy before extending political rights do better. Wade (1990) reaches a similar conclusion.