Industrial policy: Don't call it a comeback

An economist to die for: Harvard's Dani Rodrik

Published January 25, 2006 9:13PM (EST)

I fell in love with an economist this morning. His name is Dani Rodrik, and as far as How the World Works is concerned, he is the bee's knees, a specialist in economic development who is hip deep in the struggle to understand and shape globalization.

He is also prolific. A link from the New Economist alerted me to a January 2006 paper titled "What's So Special About China's Exports?" Naturally, this piqued my interest; lately, my mornings do not feel complete unless they include reading at least one dense analysis of Chinese economic growth.

A little rummaging around Rodrik's Harvard Web site revealed another paper published in January, "Goodbye Washington Consensus, Hello Washington Confusion?" that surveys the lessons learned from the failures to achieve significant economic growth in many developing nations over the past 15 years. Since understanding the baleful influence of Washington Consensus policy prescriptions on the poorest countries of the world is also a recent obsession of this space, that paper queued up next in line.

But production of How the World Works' postings ground to a complete halt when the footnotes to the Chinese export article led to a 57-page December 2004 Rodrik paper titled "Industrial Policy for the 21st Century."

Conservative economists decry "industrial policy" as state interventionism just one step removed from socialist command planning. But my own experience living in Taiwan, where the government brilliantly succeeded in helping direct Taiwan's economic growth into the high tech powerhouse that it is today, turned me into an industrial policy geek long ago. It seemed self-evident that the right mix of incentives, government assistance, and smart policy choices could help a nation thrive.

But as Rodrik observes, in the age of the Washington Consensus, governments were supposed to do their best to get out of the economy and let unregulated markets run the show. As Ronald Reagan's legacy of laissez-faire capitalism entrenched itself in the halls of power, the very idea that there was such a thing as good "industrial policy" fell into disrepute. Governments can't pick winners ran the popular put down.

Rodrik argues that the Washington Consensus prescriptions have failed for scores of countries, a fact that has contributed to the anger of the world's poorer nations during the current Doha development round of the World Trade Organization. The conservative economic response to this is to say that the problem is that those countries didn't go far enough in opening up their markets. Rodrik demolishes this argument in detail.

The paths forward for How the World Works opened up by Rodrik's three papers are too numerous to encapsulate in one blog post. But the big picture is this. While it is true that over the past ten years scores of developing nations have not experienced economic growth, and in some cases have actually fallen backwards, despite following the rules of the Washington Consensus, paradoxically, that doesn't mean the era of globalization has been an unmitigated disaster. Quite the contrary: "From the standpoint of global poverty," writes Rodrik, "the last two decades have proved the most favorable that the world has ever experienced. Rapid economic growth in China, India, and a few other Asian countries has resulted in an absolute reduction in the number of people living in extreme poverty."

But what's fascinating is that China and India made their march forward, according to Rodrik, not by willy nilly opening up their markets with neoliberal abandon, but with great attention to policy choices, and with explicit government involvement in the economy that can only be described as industrial policy. The same was true of many of the East Asian nations who developed earlier, like Taiwan and South Korea, which only started to seriously open up after they had achieved substantial economic growth through a mix of protectionism, export subsidies, and other policy choices. Given these facts, suggests Rodrik, perhaps its time to put "industrial policy" back on the front burner.

The one burning question that did not get addressed in my morning's get-acquainted-session with the work of Dani Rodrik is one that I can already hear some readers muttering: So, what does this mean for the U.S.? What kind of industrial policy should the U.S. be pursuing? If China and India and Taiwan and South Korea protected their economies while achieving economic growth, shouldn't the U.S. government now be protecting its own too, instead of whistling idly as it watches entire industries move abroad?

My gut feeling is that the richest nation on earth has different responsibilities and must play by different rules than poor countries that are trying to get a leg up. But it's still a hell of a good question. Stay tuned.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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