I attended a lecture by Robert Wade this afternoon that drew from a forthcoming paper by the LSE professor of political economy and development. His talk was titled “How can the developing countries catch up? The case for open economy industrial policies.”
The presentation was over an hour and touched on a number of important debates concerning the relationship between trade and development, so my comments here will be limited to a small subset of the issues Wade covered. In the broadest terms, Professor Wade first argued that globalization isn’t working and then made the case for revisiting and deploying industrial policy to improve economic growth in developing countries.
Wade argued that the Washington Consensus is in place and not delivering on its promise of economic growth. He said that we have been witnesses to an empirical test of an “if A, then B” proposition, where A is globalization and B is economic improvement:
How do we know we’ve had globalization? The world average for tariff revenue as a percentage of GDP has fallen significantly in the last 25 years, while trade as a portion of world GDP has approximately doubled since 1970. And the World Bank is now sheepishly conceding that context and country-specifics might matter for policymaking.
Has it worked? No. Except for Asia, regional average income per capita (in PPP terms) as a percentage of developed countries’ GDP has fallen. Moreover, as Branko Milanovic shows in Worlds Apart
, income inequality between countries has grown in the last forty years.
Do I find the previous two paragraphs convincing? Not really. While the rest of Professor Wade’s presentation was marked by disaggregation, close examination, and nuance, this introductory case against free trade is quite crude. While globalization has been happening, using global aggregates masks the vast differences in openness between countries. As Brink Lindsey forcefully argues in Against the Dead Hand, market fundamentalism hardly rules the globe. Moreover, using regional averages for economic performance groups together winners and losers, as well as open and closed economies. This tells us very little about the impact of liberalization in developing countries. Finally, Professor Wade holds globalization to a very high standard — it is expected to not only increase economic growth in poor countries, but cause absolute convergence with the rich!
Additional objections could also be made, but there’s no need to dive into messy issues like the debate between Milanovic and <A href=”Surjit Bhalla whether inequality amongst individuals has increased. I believe that Professor Wade is attacking a strawperson by showing that African economic performance during the last forty years has been miserable despite the phenomenon of globalization occurring simultaneously. Perhaps this argument will be better developed in his forthcoming paper. Thankfully, despite Wade’s use of globalization’s supposed failure as a motivating reason to explore industrial policy, it is not necessary for the rest of his argument, which is intriguing, well-argued, and relevant.
Wade put forth five propositions:
(1) Development involves diversification of production, not specialization. Putting all your eggs in the comparative advantage basket is foolish. (Imbs & Wacziarg 2003)
(2) That diversification needs to be into products associated with higher levels of income. (Hausmann, Hwang & Rodrik)
(3) Poor countries face a tradeoff between ease of diversification and gains from it. It’s easy to move to near products, but “structural transformations” that promote development are harder. (Hausmann & Klinger)
(4) Public inputs can be sector-specific. “Investment climate” surveys that ignore this are unhelpful.
(5) The supply of public inputs is subject to government failure (information, incentive, and exit failures). Developing countries should look to the institutions of Korea, Taiwan, and Japan to learn how to address these issues.
Many of these arguments echo what Dani Rodrik has been saying about industrial policy. Summarizing their intricacies and supporting evidence is beyond the scope of this blog post, so I recommend reading Rodrik’s work until Wade’s new paper becomes available.
Many of Wade’s arguments are motivated by his view of the historical success of the East Asian tigers. He assigns significant credit to industrial policy in explaining the growth of South Korea and Taiwan. I have not yet read Governing the Market, Wade’s treatise on the topic, but its thrust is summarized in this working paper. Arvind Panagariya provides a brief overview of the conflicting schools of thought on this topic.
In short, I found the discussion regarding globalization and the Washington Consensus shallow, but the great bulk of Professor Wade’s lecture was thought-provoking and nuanced. With top-class economists such as Rodrik and Wade defending interventionist industrial policy, free traders had best prepare for a vigorous debate. I look forward to Wade’s paper.
Trade Diversion 