Saturday, October 20, 2007

Rodrik on Development

I've been reading Dani Rodrik's blog and now his current book, One Economics, Many Recipes. He is lots more enthusiastic about government than I am, and mostly I feel battered in that he is mostly making a good case for stuff that I'd rather not believe: sometimes interventionist government works better than minimalist government. This makes my worldview more complicated than -- as a laygeek interested in economics and specifically in development economics -- I want it to be. I see in Arnold Kling's review that he (albeit not a laygeek) feels more or less the same way, which is not a big surprise -- my views often overlap with his.

However, I'm still feeling bothered by the book's start, right on page 1 of the Introduction:

ON A VISIT to a small Latin American country a few years back, my colleagues and I paid a courtesy visit to the minister of finance...a detailed PowerPoint presentation on his economy's recent progress...listed all the reforms...Trade barriers had been removed, price controls had been lifted, and all public enterprises had been privatized. Fiscal policy was tight, public debt levels low, and inflation nonexistent. Labor markets were as flexible as they come. There were no exchange or capital controls, and the economy was open to foreign investments of all kind. [sic] "We have done all the first-generation reforms, all the second-generation reforms, and are now embarking on...
...Alas...The economy was scarcely growing, private investment remained depressed...poverty and inequality were on the rise. What had gone wrong?

This opening created, for me, a tension for which I have not yet seen a resolution in the book; I'm not nearly done, but I don't see it indicated in Kling's review either, or when I follow up the obvious terms -- "corruption", "transparency", "bureaucracy" -- in the index. It sounds to me as if Rodrik is reporting that the minister of finance told him they'd done all the reforms...except for reform.

[[personal background: I grew up largely in Latin America, with a dad who was trying to assist businesses large and small, from the early 60s when he ran the Veracruz shipyard for Baltimore Shipbuilding and Drydock, the mid-60s lumber mill in Nicaragua, the late 60s and 70s as a "project engineer" for dams and road and shipyards for the Interamerican Development Bank in Colombia, Argentina, Uruguay and Paraguay, and so on to his death in the late 80s; he was always trying on the side to help little businesses get going. (This was his peculiar version of Quakerism.) He kept saying he was going to write a book about Latin America's failures, but I think in the end it would have been a less abstract, more dramatized version of parts of De Soto's Mystery of Capital but without de Soto's central real-estate insight; it was all about corruption, lack of transparency, and bureaucracy.]]

I look at Transparency International's corruption perceptions map and wonder which Latin American country Rodrik could be talking about: Chile is pretty good and Uruguay is not bad, but Chile's been growing pretty fast (and is pretty big, anyway) and Uruguay isn't privatized, so I guess by my standards (especially in the light of Uruguay's poor commercial (small-biz) characteristics) their respective growth patterns, and those of their neighbors, are not terribly surprising.

I remember Dad talking in 1970 about helping somebody set up a small export (leatherwork) business in Montevideo; the basic forms took more than a year, stopping at several dozen desks, even with him pushing them along as if the IDB (or BID, if you speak Spanish) thought they were important. Without that help they would have simply failed -- not necessarily from corruption, but from bureaucracy.

That's been my model of Latin American government all my life: any given government will have a lot of honest people in it, but the net effect will usually range from actively predatory down to parasitic, with the exception of Chile. (Mexico is not an exception, but has benefited and suffered in various ways from proximity to the US -- I'm thinking of legal immigration, illegal immigration, and the drug trade as well as legal trade and a few invasions.)

I'm not saying that government has to be a baleful influence. In the US, my plumber is a business, the carpenter is a business... -- I'm a business and a half (half of a partnership) duly registered for small fees with the county clerk. The Small Business Administration and Federation of Small Businesses are not perfect, but my feeling is that they are actually pretty good. The US overall has a pro-growth government, in many ways, and I'm fairly comfortable with that kind of interventionism -- but mostly that's a kind of interventionism that has to do with constantly adjusting the regulatory barriers that keep businesses from getting too predatory, rather than assisting them (and bureaucrats) in being predatory. I do get muchly less comfortable when it tries to intervene in favor of specific industries, areas, companies, people -- there you get massively harmful rent-seeking as with our agricultural subsidies. Still, there are some government interventions which may make sense, and Rodrik argues effectively. Mostly.

However, I'm not comfortable with Rodrik's starting point; it struck me as pretty strange.

(Well, maybe not.)

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