7/31/2017 After Neoliberalism, What?

by Dani Rodrik - Project Syndicate

BUSINESS & FINANCE

DANI RODRIK
Dani Rodrik is Professor of International Political Economy at Harvard Universitys John
F. Kennedy School of Government. He is the author of The Globalization Paradox:
Democracy and the Future of the World Economy and Economics Rules: The Rights and
Wrongs of the Dismal Science. His newest book Straight Talk on Trade: Ideas for a Sane
World Economy will be published in Fall 2017.

SEP 27, 2002

After Neoliberalism, What?

Two decades of applying neoliberal economic policies to the developing world have yielded
disappointing results. Latin America, the region that tried hardest to implement the
"Washington Consensus" recipes--free trade, price deregulation, and privatization--has
experienced low and volatile growth, with widening inequalities. Among the former
socialist economies of Eastern Europe and the Soviet Union, few have caught up with real
output levels that prevailed before 1990. In Sub-Saharan Africa, most economies failed to
respond to the adjustment programs demanded by the IMF and World Bank.

The few instances of success occurred in countries that marched to their own drummers--
and that are hardly poster children for neoliberalism. China, Vietnam, India: all three
violated virtually every rule in the neoliberal guidebook, even as they moved in a more
market-oriented direction.

It is time to abandon neoliberalism and the Washington Consensus. But the challenge is to
provide an alternative set of policy guidelines for promoting development, without falling
into the trap of promulgating yet another impractical blueprint, supposedly right for all
countries at all times.

The record suggests that an adequate growth program needs to be anchored in two
strategies: an investment strategy designed to kick-start growth in the short term, and an

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7/31/2017 After Neoliberalism, What? by Dani Rodrik - Project Syndicate

institution-building strategy designed to provide an economy with resilience in the face of

adverse shocks.

The key to investment strategy is to get domestic entrepreneurs excited about the home
economy. Encouraging foreign investment or liberalizing everything and then waiting for
things to improve does not work. An effective strategy must accomplish two tasks:
encourage investment in non-traditional areas, and weed out projects and investments that
fail. For this, governments must deploy both the carrot and the stick.

Learning what a country is (or can be) good at producing is a key challenge of economic
development. The carrot is needed because there is great social value in discovering, for
example, that cut lowers, or soccer balls, or computer software can be produced at low
cost, because this knowledge can orient the investments of other entrepreneurs.

The entrepreneur who makes the initial "discovery" can capture only a small part of the
social value that this knowledge generates, as other entrepreneurs will quickly emulate
him. Consequently, entrepreneurship of this type--learning what can be produced--will
typically be under-supplied in the absence of non-market incentives. In turn, the stick is
needed to ensure that these incentives do not lock in unproductive and wasteful
investments.

Implementing such a strategy may differ from country to country, depending on

administrative capacity, the prevailing incentive regime, the lexibility of the iscal system,
the degree of sophistication of the inancial sector, and the underlying political economy.
Time-bound subsidy schemes, public venture funds, and export subsidization are some of
the ways in which this approach can be implemented, but there are many others.

No single instrument will work everywhere. Governments without adequate capacity to

exercise leadership over their private sectors are likely to mess things up rather than
improve allocation of resources.

The job can be done, but economic growth requires more than eliciting a temporary boost
in investment and entrepreneurship. It also requires effort to build four types of
institutions required to maintain growth momentum and build resilience to shocks:

Market-creating institutions (for property rights and contract enforcement);

Market-regulating institutions (for externalities, economies of scale, and information about

companies);

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7/31/2017 After Neoliberalism, What? by Dani Rodrik - Project Syndicate

Market-stabilizing institutions (for monetary and iscal management);

Market-legitimizing institutions (for social protection and insurance).

Building and solidifying these institutions, however, takes time. Using an initial period of
growth to experiment and innovate on these fronts can pay high dividends later on.

A key point here is that institutional arrangements are, by necessity, country-speci ic.
Discovering what works in any one country requires experimentation. After all, institutions
are not hot-house plants capable of being planted in any soil and climate. Reforms that
succeed in one setting may perform poorly or fail completely in others.

Such speci icity helps explain why successful countries--China, India, South Korea, and
Taiwan, among others--usually combined unorthodox elements with orthodox policies. It
also accounts for why important institutional differences persist among the advanced
countries of North America, Western Europe, and Japan in areas such as the role of the
public sector, the legal system, corporate governance, inancial markets, labor markets, and
social insurance.

While economic analysis can help in making institutional choices, there is also a large role
for public deliberation and collective choice. In fact, we can think of participatory
democracy as a meta-institution that helps select among the "menu" of possible
institutional arrangements in each area.

Designing such a growth strategy is both harder and easier than implementing standard
neoliberal policies. It is harder because the binding constraints on growth are usually
country-speci ic and do not respond well to standardized recipes. But it is easier because
once those constraints are appropriately targeted, relatively simple policy changes can yield
enormous economic payoffs and start a virtuous cycle of growth and institutional reform.

Adopting this approach does not mean abandoning mainstream economics--far from it.
Neoliberalism is to neoclassical economics as astrology is to astronomy. In both cases, it
takes a lot of blind faith to go from one to the other. Critics of neoliberalism should not
oppose mainstream economics--only its misuse.

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