Dani rodrik trading in illusions pdf

This trend is bad news for the world's poor nations. By focusing on international integration, governments in poor nations divert human resources, administrative capabilities, and political capital away from more urgent development priorities such as education and public health.

World markets are a source of technology and capital; it would be silly for the developing world not to exploit these opportunities. But globalization is not a shortcut to development. Policymakers need to forge a domestic growth strategy by relying on domestic investors and domestic institutions.

Global integration has become, for all practical purpose, a substitute for development strategy. The Financial Stability Forum FSF has designated 12 of these standards as essential for creating sound financial systems in developing countries. A cynic might wonder whether the point of all these prerequisites is merely to provide easy cover for eventual failure.

So if Bangladesh's freer trade policy does not produce a large enough spurt in growth, the World Bank concludes that the problem must involve lagging reforms in public administration or continued "political uncertainty" always a favorite.

The rules for admission into the world economy not only reflect little awareness of development priorities; they are often completely unrelated to sensible economic principles. Countries like South Korea, Taiwan and India liberalized trade gradually over a period of decades, not years. They were free to do their own thing.

Neither economic theory nor empirical evidence guarantees that deep trade liberalization will deliver higher economic growth. Countries that have achieved long-term economic growth have usually combined the opportunities offered by world markets with a growth strategy that mobilizes the capabilities of domestic institutions and investors. Developing countries must focus on developing domestic institution and investors. In my opinion I completely agree with the author, an example is Brazil, it is a developing country that recently hosted the world football cup, however the country still lacks in infrastructure public transport..

Related Papers. Industrial policy in developing countries: overview and lessons from seven country cases. By Tilman Altenburg. By Martin Ochoa. By Junior Hakweenda. Take the East Asian tigers or China, the advocates say.

Where would they be without international trade and foreign capital flows? That these countries reaped enormous benefits from their progressive integration into the world economy is undeniable. Countries like South Korea and Taiwan had to abide by few international constraints and pay few of the modern costs of integration during their formative growth experience in the s and s. So these countries combined their outward orientation with unorthodox policies: high levels of tariff and nontariff barriers, public ownership of large segments of banking and industry, export subsidies, domestic-content requirements, patent and copyright infringements, and restrictions on capital flows including on foreign direct investment.

China also followed a highly unorthodox two-track strategy, violating practically every rule in the guidebook including, most notably, the requirement of private property rights. All of these countries liberalized trade gradually, over a period of decades, not years. Significant import liberalization did not occur until after a transition to high economic growth had taken place. And far from wiping the institutional slate clean, all of these nations managed to eke growth out of their existing institutions, imperfect as they may have been.

Indeed, when some of the more successful Asian economies gave in to Western pressure to liberalize capital flows rapidly, they were rewarded with the Asian financial crisis. South Korea, China, India, and the other Asian success cases had the freedom to do their own thing, and they used that freedom abundantly.

The Asian experience highlights a deeper point: A sound overall development strategy that produces high economic growth is far more effective in achieving integration with the world economy than a purely integrationist strategy that relies on openness to work its magic. In other words, the globalizers have it exactly backwards. Integration is the result, not the cause, of economic and social development.

A relatively protected economy like Vietnam is integrating with the world economy much more rapidly than an open economy like Haiti because Vietnam, unlike Haiti, has a reasonably functional economy and polity. Integration into the global economy, unlike tariff rates or capital-account regulations, is not something that policymakers control directly.

Telling finance ministers in developing nations that they should increase their "participation in world trade" is as meaningful as telling them that they need to improve technological capabilities — and just as helpful.

Policy- makers need to know which strategies will produce these results, and whether the specific prescriptions that the current orthodoxy offers are up to the task. Do lower trade barriers spur greater economic progress? If anything, the evidence for the s indicates a positive relationship between import tariffs and economic growth [see chart on opposite page]. The only clear pattern is that countries dismantle their trade restrictions as they grow richer.

The absence of a strong negative relationship between trade restrictions and economic growth may seem surprising in view of the ubiquitous claim that trade liberalization promotes higher growth. Indeed, the economics literature is replete with cross-national studies concluding that growth and economic dynamism are strongly linked to more open trade policies.

Upon closer look, however, such studies turn out to be unreliable. Once these misdiagnoses are corrected, any meaningful relationship across countries between the level of trade barriers and economic growth evaporates. The evidence on the benefits of liberalizing capital flows is even weaker. In theory, the appeal of capital mobility seems obvious: If capital is free to enter and leave markets based on the potential return on investment, the result will be an efficient allocation of global resources.

But in reality, financial markets are inherently unstable, subject to bubbles rational or otherwise , panics, shortsightedness, and self-fulfilling prophecies. There is plenty of evidence that financial liberalization is often followed by financial crash — just ask Mexico, Thailand, or Turkey — while there is little convincing evidence to suggest that higher rates of economic growth follow capital-account liberalization.

Perhaps the most disingenuous argument in favor of liberalizing international financial flows is that the threat of massive and sudden capital movements serves to discipline policymakers in developing nations who might otherwise manage their economies irresponsibly. In practice, however, the discipline argument falls apart. Behavior in international capital markets is dominated by mood swings unrelated to fundamentals. In good times, a government with a chronic fiscal deficit has an easier time financing its spending when it can borrow funds from investors abroad; witness Russia prior to or Argentina in the s.

And in bad times, governments may be forced to adopt inappropriate policies in order to conform to the biases of foreign investors; witness the excessively restrictive monetary and fiscal policies in much of East Asia in the immediate aftermath of the Asian financial crisis. A key reason why Malaysia was able to recover so quickly after the imposition of capital controls in September was that Prime Minister Mahathir Mohamad resisted the high interest rates and tight fiscal policies that South Korea, Thailand, and Indonesia adopted at the behest of the International Monetary Fund.

Well-trained economists are justifiably proud of the textbook case in favor of free trade. However, in their zeal to promote the virtues of trade, the most ardent proponents are peddling a cartoon version of the argument, vastly overstating the effectiveness of economic openness as a tool for fostering development. Such claims only endanger broad public acceptance of the real article because they unleash unrealistic expectations about the benefits of free trade.

Neither economic theory nor empirical evidence guarantees that deep trade liberalization will deliver higher economic growth. Economic openness and all its accouterments do not deserve the priority they typically receive in the development strategies pushed by leading multilateral organizations.

Countries that have achieved long-term economic growth have usually combined the opportunities offered by world markets with a growth strategy that mobilizes the capabilities of domestic institutions and investors.

Designing such a growth strategy is both harder and easier than implementing typical integration policies. It is harder because the binding constraints on growth are usually country specific and do not respond well to standardized recipes.

But it is easier because once those constraints are targeted, relatively simple policy changes can yield enormous economic payoffs and start a virtuous cycle of growth and additional reform.

Unorthodox innovations that depart from the integration rule book are typically part and parcel of such strategies. Public enterprises during the Meiji restoration in Japan; township and village enterprises in China; an export processing zone in Mauritius; generous tax incentives for priority investments in Taiwan; extensive credit subsidies in South Korea; infant-industry protection in Brazil during the s and s — these are some of the innovations that have been instrumental in kick-starting investment and growth in the past.

Few of these experiments have worked as well when transplanted to other settings, only underscoring the decisive importance of local conditions. To be effective, development strategies need to be tailored to prevailing domestic institutional strengths.

There is simply no alternative to a homegrown business plan. Policymakers who look to Washington and financial markets for the answers are condemning themselves to mimicking the conventional wisdom du jour, and to eventual disillusionment.

From the White House to Turtle Bay, sanctions have never been more popular. But why are they so hard to make work? Feature Trading in Illusions Advocates of global economic integration hold out utopian visions of the prosperity that developing countries will reap if they open their borders to commerce and capital. This hollow promise diverts poor nations' attention and resources from the key domestic innovations needed to spur economic growth.

By Dani Rodrik. November 18, , PM. FREE TRADE-OFFS Most but certainly not all of the institutional reforms on the integrationist agenda are perfectly sensible, and in a world without financial, administrative, or political constraints, there would be little argument about the need to adopt them. ASIAN MYTHS Even if the institutional reforms needed to join the international economic community are expensive and preclude investments in other crucial areas, pro-globalization advocates argue that the vast increases in economic growth that invariably result from insertion into the global marketplace will more than compensate for those costs.

Dani Rodrik is professor of international political economy at the John F. Kennedy School of Government at Harvard University. Tags: Economic Development , Economics. Trending 1.

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