As trade agreements have evolved and gone beyond import tariffs and quotas into regulatory rules and harmonization, they have become more difficult to fit into received economic theory. Nevertheless, most economists continue to regard trade agreements such as the Trans Pacific Partnership (TPP) favorably. The default view seems to be that these arrangements get us closer to free trade by reducing transaction costs associated with regulatory differences or explicit protectionism. An alternative perspective is that trade agreements are the result of rent-seeking, self-interested behavior on the part of politically well-connected firms – international banks, pharmaceutical companies, multinational firms. They may result in freer, mutually beneficial trade, through exchange of market access. But they are as likely to produce purely redistributive outcomes under the guise of “freer trade.”
We develop a conceptual framework to highlight the role of ideas as a catalyst for policy and institutional change. We make an explicit distinction between ideas and vested interests and show how they feed into each other. In doing so the paper integrates the Keynes-Hayek perspective on the importance of ideas with the currently more fashionable Stigler-Becker (in-terests only) approach to political economy. We distinguish between two kinds of ideational politics – the battle among different worldviews on the efficacy of policy (worldview politics) versus the politics of victimhood, pride and identity (identity politics). Political entrepreneurs discover identity and policy ‘memes’ (narratives, cues, framing) that shift beliefs about how the world works or a person’s belief of who he is (i.e. identity). Our framework identifies a complementarity between worldview politics and identity politics and illustrates how they may reinforce each other. In particular, an increase in identity polarization may be associated with a shift in views about how the world works. Furthermore, an increase in income inequality is likely to result in a greater incidence of ideational politics. Finally, we show how ideas may not just constrain, but also ‘bite’ the interests that helped propagate them in the first instance.
Populism may seem like it has come out of nowhere, but it has been on the rise for a while. I argue that economic history and economic theory both provide ample grounds for anticipating that advanced stages of economic globalization would produce a political backlash. While the backlash may have been predictable, the specific form it took was less so. I distinguish between left-wing and right-wing variants of populism, which differ with respect to the societal cleavages that populist politicians highlight. The first has been predominant in Latin America, and the second in Europe. I argue that these different reactions are related to the relative salience of different types of globalization shocks.
I distinguish between political and economic populism. Both are averse to agencies of restraint, or, equivalently, delegation to technocrats or external rules. In the economic domain, delegation to independent agencies (domestic or foreign) occurs in two different contexts: (a) in order to prevent the majority from harming itself in the future; and (b) in order to cement a redistribution arising from a temporary political advantage for the longer-term. Economic policy restraints that arise in the first case are desirable; those that arise in the second case are much less so.
Developing countries made considerable gains during the first decade of the 21st century. Their economies grew at unprecedented rates, resulting in large reductions in extreme poverty and a significant expansion of the middle class. But more recently that progress has slowed with an economic environment of lackluster global trade, not enough jobs coupled with skills mismatches, continued globalization and technological change, greater income inequality, unprecedented population aging in richer countries, and youth bulges in the poorer ones. This essay examines how seven key countries fared from 1990-2010 in their development quest. The sample includes seven developing countries—Botswana, Ghana, Nigeria, Zambia, India, Vietnam and Brazil —all of which experienced rapid growth in recent years, but for different reasons. The patterns of growth are analyzed in each of these countries using a unifying framework which draws a distinction between the “structural transformation” and “fundamentals” challenge in growth. Out of these seven countries, the traditional path to rapid growth of export oriented industrialization only played a significant role in Vietnam.
We distinguish between three sets of rights – property rights, political rights, and civil rights – and provide a taxonomy of political regimes. The distinctive nature of liberal democracy is that it protects civil rights (equality before the law for minorities) in addition to the other two. When democratic transitions are the product of a settlement between the elite (who care mostly about property rights) and the majority (who care mostly about political rights), they generically fail to produce liberal democracy. This is because the minority has neither the resources nor the numbers to make a contribution to the settlement. We develop a formal model to sharpen the contrast between electoral and liberal democracies and highlight circumstances under which liberal democracy can emerge. We show that liberal democracy requires quite special circumstances: mild levels of income inequality as well as weak identity cleavages. We provide some evidence consistent with this result, and also present a new classification of countries as electoral or liberal democracies.
The bulk of global inequality is accounted for by income differences across countries rather than within countries. Expanding trade with China has aggravated inequality in some advanced economies, while ameliorating global inequality. But the “China shock” is receding and other low-income countries are unlikely to replicate China’s export-oriented industrialization experience. Relaxing restrictions on cross-border labor mobility might have an even stronger positive effect on global inequality. However it also raises a similar tension. While there would likely be adverse effects on low-skill workers in the advanced economies, international labor mobility has some advantages compared to further liberalizing international trade in goods. I argue that none of the contending perspectives -- national-egalitarian, cosmopolitan, utilitarian -- provides on its own an adequate frame for evaluating the consequences.
Growth has accelerated in a wide range of developing countries over the last couple of decades, resulting in an extraordinary period of convergence with the advanced economies. We analyze this experience from the lens of structural change – the reallocation of labor from low- to high-productivity sectors. Patterns of structural change differ greatly in the recent growth experience. In contrast to the East Asian experience, none of the recent growth accelerations in Latin America, Africa, or South Asia was driven by rapid industrialization. Beyond that, we document that recent growth accelerations were based on either rapid within-sector labor productivity growth (Latin America) or growth-increasing structural change (Africa), but rarely both at the same time. The African experience is particularly intriguing, as growth-enhancing structural change appears to have come typically at the expense of declining labor productivity growth in the more modern sectors of the economy. We explain this anomaly by arguing that the forces that promoted structural change in Africa originated on the demand side, through either external transfers or increase in agricultural incomes. In contrast to Asia, structural change was the result of increased demand for goods and services produced in the modern sectors of the economy rather than productivity improvements in these sectors.
Liberal democracy has been difficult to institute and sustain in developing countries. This has to do both with ideational factors—the absence of a liberal tradition prior to electoral mobilization—and structural conditions—the prevalence of mass mobilization along identity rather than class cleavages. This paper considers the conditions under which liberal democracy emerges and speculates about its future in developing countries.
I document a significant deindustrialization trend in recent decades that goes considerably beyond the advanced, post‐industrial economies. The hump‐shaped relationship between industrialization (measured by employment or output shares) and incomes has shifted downwards and moved closer to the origin. This means countries are running out of industrialization opportunities sooner and at much lower levels of income compared to the experience of early industrializers. Asian countries and manufactures exporters have been largely insulated from those trends, while Latin American countries have been especially hard hit. Advanced economies have lost considerable employment (especially of the low‐skill type), but they have done surprisingly well in terms of manufacturing output shares at constant prices. While these trends are not very recent, the evidence suggests both globalization and labor‐saving technological progress in manufacturing have been behind these developments. The paper briefly considers some of the economic and political implications of these trends.
Large gaps in labor productivity between the traditional and modern parts of the economy are a fundamental reality of developing societies. In this paper, we document these gaps, and emphasize that labor flows from low-productivity activities to high-productivity activities are a key driver of development. Our results show that since 1990 structural change has been growth reducing – with labor moving from low – to high- productivity sectors – in both Africa and Latin America, with the most striking changes taking place in Latin America. Our results also show that things seem to be turning around in Africa: after 2000, structural change contributed positively to Africa’s overall productivity growth. For Africa, these results are encouraging. Moreover, the very low levels of productivity and industrialization across most of the continent indicate an enormous potential for growth through structural change.
Green growth requires green technologies: production techniques that economize on exhaustible resources and emit fewer greenhouse gases. The availability of green technologies both lowers social costs in the transition to a green growth path and helps achieve a satisfactory rate of material progress under that path. The theoretical case in favour of using industrial policy to facilitate green growth is quite strong. Economists’ traditional scepticism on industrial policy is grounded instead on pragmatic considerations having to do with the difficulty of achieving well-targeted and effective interventions in practice. While these objections deserve serious attention, I argue that they are not insurmountable. A key objective of this paper is to show how the practice of industrial policy can be improved by designing institutional frameworks that counter both informational and political risks.
SSA has grown rapidly over the last decade, but a curious feature of this growth was that it was accompanied by little structural change towards non-traditional tradables (such as manufactures). Now that China, the advanced economies, and most emerging markets are all slowing down, the question whether Africa’s high growth can be sustained looms larger. This article looks at this question from the lens of modern growth theory, paying particular attention to structural issues that are crucial for low-income countries. It comes down on the pessimistic side, due to what appear to be poor prospects for industrialization. This article also considers alternative models of growth, based on services instead of manufactures.
Revised version of the paper written for the Center for Global Development, Richard H. Sabot Lecture, on April 24, 2014.
Ideas are strangely absent from modern models of political economy. In most prevailing theories of policy choice, the dominant role is instead played by "vested interests"—elites, lobbies, and rent-seeking groups which get their way at the expense of the general public. Any model of political economy in which organized interests do not figure prominently is likely to remain vacuous and incomplete. But it does not follow from this that interests are the ultimate determinant of political outcomes. Here I will challenge the notion that there is a well-defined mapping from "interests" to outcomes. This mapping depends on many unstated assumptions about the ideas that political agents have about: 1) what they are maximizing, 2) how the world works, and 3) the set of tools they have at their disposal to further their interests. Importantly, these ideas are subject to both manipulation and innovation, making them part of the political game. There is, in fact, a direct parallel, as I will show, between inventive activity in technology, which economists now routinely make endogenous in their models, and investment in persuasion and policy innovation in the political arena. I focus specifically on models professing to explain economic inefficiency and argue that outcomes in such models are determined as much by the ideas that elites are presumed to have on feasible strategies as by vested interests themselves. A corollary is that new ideas about policy—or policy entrepreneurship—can exert an independent effect on equilibrium outcomes even in the absence of changes in the configuration of political power. I conclude by discussing the sources of new ideas.
Winter 2014. An earlier draft was titled “Ideas and Interests in Political Economy.”