In a couple of recent conversations with people about preferential trade, I’ve said that rich country trade barriers are rarely the binding constraint upon LDC export volume. I’ve argued that preferential trade policies always have costs, and in the cases where developed country protectionism isn’t the binding constraint, zero benefits. It turns out that I’ve been unknowingly implying one of the ideas behind “growth dianogistics,” a “new approach to economic reform” suggested by Ricardo Hausmann, Dani Rodrik, and Andrés Velasco. Here’s a summary from the March issue of F&D:

In this article, we propose a new approach to reform—one that is much more contingent on the economic environment. Countries, we argue, need to figure out the one or two most binding constraints on their economies and then focus on lifting those. Presented with a laundry list of needed reforms, policymakers have either tried to fix all of the problems at once or started with reforms that were not crucial to their country’s growth potential. And, more often than not, reforms have gotten in each other’s way, with reform in one area creating unanticipated distortions in another area. By focusing on the one area that represents the biggest hurdle to growth, countries will be more likely to achieve success from their reform efforts.

Read the full article. Academic version available here as a PDF. Obviously, this ties into Joe Stiglitz’s suggestions about policy sequencing.

I am a bit uncomfortable with this example, however:

Instead of solving these problems for all economic activities—a daunting task—the Dominican Republic managed to provide the appropriate public goods… the maquila sector was given special trade policy treatment. In this sense, the Dominican Republic is a good example of an alternative path to development: one that identifies sectors with high potential and then provides them with the institutions and public goods they need to thrive.

My discomfort stems from the fact that I have less confidence in industrial policy and sectoral targetting than Rodrik does, at least based upon the empirical assessments I’ve read in regards to South Korea.

[Hat tip: Dennis de Tray at CGD]