International Monetary Fund

Summary of an IMF Book Forum

Recipes for Success: Dani Rodrik on How to Grow the Economic Pie

November 29, 2007

Why do some countries grow faster than others? Which policies help growth and which ones hinder it? A development strategy that identifies and attacks country-specific barriers to growth is the key to sustained growth, according to Dani Rodrik of Harvard University.

  • Identify binding constraints: which reforms promise the greatest bang for the buck?
  • Industrial policy "the norm rather than the exception" in development
  • A "strategic approach" rather than "laundry list" of reforms

Dani Rodrik previewed his latest book, One Economics, Many Recipes: Globalization, Institutions, and Growth at the IMF recently. He said that economic development is working rather well—at least in the most populous places in the world—but economic development policy is not.

Rodrik said that vast parts of the world's economy have been doing quite well in the last quarter-century. Studies on poverty reveal 400 million fewer people living in extreme poverty since the early-1980s. However, this success has not come from doing all the reforms on a long list or from following a particular sequence of policy reforms. In most cases where successful economic development has occurred, argued Rodrik, this "North American" or "Washington Consensus" prescription has not been the guiding light of change.

Rodrik noted that his 1997 book, Has Globalization Gone Too Far? was partly written while he was visiting the IMF. The invitation to present his controversial ideas again led him to quip that "there are interesting ways in which the IMF has been subversive. It gets too much criticism for not being open to different ideas—or for maybe surreptitiously promoting them in my case."

The Art of Development Policy

Rodrik said that growth opportunities and constraints faced by countries depend on initial conditions that have been shaped by history, endowments, administrative capabilities, and a host of other factors. As such, the art of development policy really lies in "identifying areas of reform where you get the biggest bang for your buck." Development success required not a big bang approach, but rather a selective, sequential, and often unorthodox approach that accounted for country-specific circumstances.

Early thinkers in the field of development economics understood that economic development is about structural transformation and that markets generally underprovide incentives for such a transformation to occur. Rodrik said this explains why countries that have successfully developed have used government-driven industrial policy "as the norm rather than the exception."

But how can countries design a successful industrial policy when faced with the constraint of low institutional capacity? Sticks should be combined with carrots to strike an appropriate balance between the two, said Rodrik. Bureaucratic autonomy to decide what is good for the economy as a whole should be combined with information from the private sector on the constraints to growth. Industrial policy has worked where governments have succeeded in creating an institutional setting that allows them to remain in touch with the private sector—using deliberation councils or industrial associations—about constraints they faced.

Lessons from U.S. Industrial Policy?

Commenting on the book, the Wall Street Journal's Bob Davis agreed that industrial policy is used in all countries "in one way or another even if they say they do not." He said there were lessons from U.S. industrial policy that could be applied elsewhere. The most successful use of industrial policy in the U.S. government, Davis said, is by "the part of the Pentagon called the Defense Advanced Research Projects Agency (DARPA). They are the ones who spur the research that led to the Internet, that led to jet engines, and that led to a lot of the advances in rocketry and so on."

Davis said DARPA's success led him to believe that industrial policies worked under two conditions. First, "industrial policy works best when the government is trying to buy something for itself" because then "it can better tell the difference between what is a useful kind of project to pursue and what is not." Second, it is important to create competition among the companies bidding for the government contracts. DARPA, Davis said, "gives out contracts for a dozen different companies" to set up this competition.

Rodrik quipped that Bob Davis "was the most heterodox amongst us all" for his championing of a "public procurement model for industrial policy for developing countries." However, he was skeptical that the DARPA model would work elsewhere given how questionable "public procurement practices" are in many developing countries.

Beyond the Washington Consensus?

In Rodrik's view, the Washington Consensus approach to economic reforms overlooks the fact that it is impossible to remove all distortions in an economy simultaneously. It is based on a "first-best" model of the economy—it says that if countries attacked the "ten main distortions," they would achieve higher growth. In reality, there are many more distortions and there is never the capacity to attack them all at once. Instead, economic policy reform in developing countries requires a solid "second-best reasoning" and "a strategic approach rather than a laundry-list approach."

Speaking at the event, the World Bank's Roberto Zagha said that Rodrik's critiques of the Washington Consensus and his novel ideas on growth strategies had been influential in the Bank's thinking on growth. Rodrik's ideas also permeate the work of the Commission on Growth and Development, chaired by Nobel laureate Michael Spence, which is studying the "conditions, policies and strategies most likely to lead to rapid and sustained economic growth," defined as 7 percent annual growth over a period of 25 years or more. The commission plans to issue its report by mid-2008, but offering an early taste of the results, Zagha said that it appears that while the "ingredients are common across different growth experiences, the recipes are very country specific."

Arvind Subramanian, of the Peterson Institute and the Center for Global Development, said the contribution of Rodrik's book had been to show that "successful growth experiences have been extremely varied and rich" and do not easily fit the intellectual straitjacket, or often the "interest-driven agenda," of the Washington Consensus. But he said both Rodrik and the Washington Consensus have in common the view that policymakers know which are "the policy levers out there that can be pulled to trigger growth" but in reality it was difficult to know with any policy lever "where it will succeed, how it will succeed, the circumstances which will allow it to succeed in some cases and not others?"

During the Q&A session, Ted Truman of the Peterson Institute asked whether the Washington Consensus, or any other list of reforms, wasn't simply "reasonable things to think about when you are looking for bottlenecks" to growth. Rodrik agreed that "probably the smartest and most-effective employers of that framework" were using it in that manner and concluded that one way of thinking about his book is that it is an attempt to "generalize from the actual practice of what successful practitioners of that doctrine did."