Publications by Author: Rodrik, Dani

2017
Straight Talk on Trade: Ideas for a Sane World Economy
Rodrik, Dani. 2017. Straight Talk on Trade: Ideas for a Sane World Economy. Princeton: Princeton University Press. Publisher's Version Abstract

Not so long ago the nation-state seemed to be on its deathbed, condemned to irrelevance by the forces of globalization and technology. Now it is back with a vengeance, propelled by a groundswell of populists around the world. In Straight Talk on Trade, Dani Rodrik, an early and outspoken critic of economic globalization taken too far, goes beyond the populist backlash and offers a more reasoned explanation for why our elites’ and technocrats’ obsession with hyper-globalization made it more difficult for nations to achieve legitimate economic and social objectives at home: economic prosperity, financial stability, and equity.

Rodrik takes globalization’s cheerleaders to task, not for emphasizing economics over other values, but for practicing bad economics and ignoring the discipline’s own nuances that should have called for caution. He makes a case for a pluralist world economy where nation-states retain sufficient autonomy to fashion their own social contracts and develop economic strategies tailored to their needs. Rather than calling for closed borders or defending protectionists, Rodrik shows how we can restore a sensible balance between national and global governance. Ranging over the recent experiences of advanced countries, the eurozone, and developing nations, Rodrik charts a way forward with new ideas about how to reconcile today’s inequitable economic and technological trends with liberal democracy and social inclusion.

Deftly navigating the tensions among globalization, national sovereignty, and democracy, Straight Talk on Trade presents an indispensable commentary on today’s world economy and its dilemmas, and offers a visionary framework at a critical time when we need it most.

2015
Economics Rules
Rodrik, Dani. 2015. Economics Rules. New York: W.W. Norton & Company, Inc. Publisher's Version Abstract

In the wake of the financial crisis and the Great Recession, economics seems anything but a science. In this sharp, masterfully argued book, Dani Rodrik, a leading critic from within, takes a close look at economics to examine when it falls short and when it works, to give a surprisingly upbeat account of the discipline.

Drawing on the history of the field and his deep experience as a practitioner, Rodrik argues that economics can be a powerful tool that improves the world—but only when economists abandon universal theories and focus on getting the context right. Economics Rules argues that the discipline's much-derided mathematical models are its true strength. Models are the tools that make economics a science.

Too often, however, economists mistake a model for the model that applies everywhere and at all times. In six chapters that trace his discipline from Adam Smith to present-day work on globalization, Rodrik shows how diverse situations call for different models. Each model tells a partial story about how the world works. These stories offer wide-ranging, and sometimes contradictory, lessons—just as children’s fables offer diverse morals.

Whether the question concerns the rise of global inequality, the consequences of free trade, or the value of deficit spending, Rodrik explains how using the right models can deliver valuable new insights about social reality and public policy. Beyond the science, economics requires the craft to apply suitable models to the context.

At once a forceful critique and defense of the discipline, Economics Rules charts a path toward a more humble but more effective science.

2011
The Globalization Paradox: Democracy and the Future of the World Economy

Surveying three centuries of economic history, a Harvard professor argues for a leaner global system that puts national democracies front and center.

From the mercantile monopolies of seventeenth-century empires to the modern-day authority of the WTO, IMF, and World Bank, the nations of the world have struggled to effectively harness globalization's promise. The economic narratives that underpinned these eras—the gold standard, the Bretton Woods regime, the "Washington Consensus"—brought great success and great failure. In this eloquent challenge to the reigning wisdom on globalization, Dani Rodrik offers a new narrative, one that embraces an ineluctable tension: we cannot simultaneously pursue democracy, national self-determination, and economic globalization. When the social arrangements of democracies inevitably clash with the international demands of globalization, national priorities should take precedence. Combining history with insight, humor with good-natured critique, Rodrik's case for a customizable globalization supported by a light frame of international rules shows the way to a balanced prosperity as we confront today's global challenges in trade, finance, and labor markets.

Rodrik, Dani. 2011. “The Future of Convergence.” Harvard Kennedy School. Publisher's Version Abstract
Novelists have a better track record than economists at foretelling the future. Consider then Gary Shteyngart’s timely comic novel Super Sad True Love Story (Random House, 2010), which provides a rather graphic vision of what lies in store for the world economy. The novel takes place in the near future and is set against the backdrop of a United States that lies in economic and political ruin. The country’s bankrupt economy is ruled with a firm hand by the IMF from its new Parthenon-shaped headquarters in Singapore. China and sovereign wealth funds have parceled America’s most desirable real estate among themselves. Poor people are designated as LNWI (“low net worth individuals”) and are being pushed into ghettoes. Even skilled Americans are desperate to acquire residency status in foreign lands. This is sheer fantasy of course, but one that seems to resonate well with the collective mood. A future in which the US and other advanced economies are forced to play second fiddle to the dynamic emerging economies in Asia and elsewhere is rapidly becoming cliché. This vision is based in part on the very rapid pace of economic growth that emerging and developing economies experienced in the run-up to the global financial crisis of 2008-2009. Latin America benefited from a pace of economic development that it had not experienced since the 1970s, and Africa began to close the gap with the advanced countries for the first time since countries in the continent received their independence. Even though most of these countries were hit badly by the crisis, their recovery has also been swift. Optimism on developing countries is matched by pessimism on the rich country front. The United States and Europe have emerged from the crisis with debilitating challenges. They need to address a crushing debt burden and its unpleasant implications for fiscal and monetary policy. They also need to replace growth models which were based in many instances on finance, real estate, and unsustainable levels of borrowing. Japan has long ceased to exhibit any growth dynamism. And the eurozone’s future remains highly uncertain—with the economic and political ramifications of its unraveling looking nothing less than scary. In such an environment, rapid growth in the developing world is the only thing that could propel the world economy forward and generate increasing demand for rich-country goods and services—the only silver lining in an otherwise dreary future. The question I address in this paper is whether this gap in performance between the developed and developing worlds can continue, and in particular, whether developing nations can sustain the rapid growth they have experienced of late. I will not have anything to say on the prospects for the advanced economies themselves, assuming, along with conventional wisdom, that their growth will remain sluggish at best. My focus is squarely on the developing and emerging countries and on the likelihood of continued convergence.

HKS Faculty Research Working Paper Series RWP11-033, John F. Kennedy School of Government, Harvard University.

Harvard DASH repository: http://nrs.harvard.edu/urn-3:HUL.InstRepos:5131504


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2009

What a difference the crisis has made for the International Monetary Fund. It was just a few months ago that this important but unloved institution, a landmark of post-war global economic arrangements, seemed destined to irrelevance.

The IMF has long been a whipping boy for both left and right—the former because of the Fund’s emphasis on fiscal rectitude and economic orthodoxy, and the latter because of its role in bailing out indebted nations. Developing nations grudgingly took its advice, while advanced nations, not needing the money, ignored it. In a world where private capital flows dwarf the resources at its disposal, the IMF had come to seem an anachronism.

And, when some of the IMF’s largest debtors (Brazil and Argentina) began to prepay their debts a few years ago with no new borrowers in sight, it looked like the final nail in the coffin had been struck. The IMF seemed condemned to run out of income, in addition to losing its raison d’être. It shrank its budgets and began to downsize, and, while it was handed some new responsibilities in the meantime—surveillance over "currency manipulation," in particular—its deliberations proved largely irrelevant.

But the crisis has invigorated the IMF. Under its capable managing director, Dominique Strauss-Kahn, the Fund has been one of the few official agencies ahead of—instead of behind — the curve. It moved quickly to establish a fast-disbursing emergency line of credit for countries with "reasonable" policies. It ardently championed global fiscal stimulus on the order of 2 per cent of world GNP—a position that is all the more remarkable in view of its traditional conservatism on all fiscal matters. And, in the run-up to the G-20 summit in London, it thoroughly overhauled its lending policies, de-emphasising traditional conditionality and making it easier for countries to qualify for loans.

Even more significantly, the IMF has emerged from the London meeting with substantially greater resources, as well as new responsibilities. The G-20 promised to triple the Fund’s lending capacity (from $250 billion to $750 billion), issue $250 billion of new Special Drawing Rights (a reserve asset made up of a basket of major currencies), and permit the Fund to borrow in capital markets (which it has never done) if necessary. The IMF was also designated as one of two lead agencies—along with an expanded Financial Stability Forum (now renamed the Financial Stability Board)—charged with providing early warning of macroeconomic and financial risks and issuing the requisite policy recommendations.

Another piece of good news is that the Europeans have now given up their claim on naming the IMF’s managing director (as have the Americans their corresponding claim on the World Bank presidency). These senior officials are henceforth to be selected "through an open, transparent, and merit-based selection process." This will provide for better governance (although Strauss-Kahn’s leadership has been exemplary), and will enhance both institutions’ legitimacy in the eyes of developing nations.

So the IMF now finds itself at the centre of the economic universe once again. How will it choose to deploy its newfound power?

The greatest risk is that it will once again over-reach and over-play its hand. That is what happened in the second half of the 1990s, as the IMF began to preach capital-account liberalisation, applied over-stringent fiscal remedies during the Asian financial crisis, and single-handedly tried to reshape Asian economies. The institution has since acknowledged its errors in all these areas. But it remains to be seen if the lessons have been fully internalised, and whether we will have a kinder, gentler IMF in lieu of a rigid, doctrinaire one.

One encouraging fact is that developing countries will almost certainly get a larger say in how the Fund is run. This will ensure that poorer nations’ views receive a more sympathetic hearing in the future.

But simply giving developing nations greater voting power will make little difference if the IMF’s organisational culture is not changed as well. The Fund is staffed by a large number of smart economists, who lack much connection to (and appreciation for) the institutional realities of the countries on which they work. Their professional expertise is validated by the quality of their advanced degrees, rather than by their achievements in practical policymaking. This breeds arrogance and a sense of smug superiority over their counterparts—policymakers who must balance multiple, complicated agendas.

Countering this will require proactive efforts by the IMF’s top leadership in recruitment, staffing and promotion. One option would be to increase substantially the number of mid-career recruits with actual practical experience in developing countries. This would make the IMF staff more cognizant of the value of local knowledge relative to theoretical expertise.

Another strategy would be to relocate some of the staff, including those in functional departments, to "regional offices" in the field. This move would likely face considerable resistance from staff who have gotten used to the perks of Washington, DC. But there is no better way to appreciate the role of context than to live in it. The World Bank, which engaged in a similar decentralisation a while back, has become better at serving its clients as a result (without facing difficulties in recruiting top talent).

This is an important moment for the IMF. The international community is putting great store in the Fund’s judgment and performance. The Fund will require internal reforms to earn that trust fully.

The author, Professor of Political Economy at Harvard University’s John F Kennedy School of Government, is the first recipient of the Social Science Research Council’s Albert O Hirschman Prize. His latest book is One Economics, Many Recipes: Globalization, Institutions, and Economic Growth.
2008
Development economics has long been split between macro-development economists—who focus on economic growth, international trade, and fiscal/macro policies—and microdevelopment economists—who study microfinance, education, health, and other social programs. Even though the central question that animates both sets of economists ostensibly is how to achieve sustainable improvements in living standards in poor countries, the concerns and methods of these two camps have at times diverged so much that they seem at opposite extremes of the economics discipline. I shall argue in this paper that there are some good reasons to be optimistic about the reunification of the field, as these sharp distinctions are eroding in some key respects. But there are also some reasons for pessimism, related to divergence in empirical methods. This paper covers both the good and the bad news.
Rodrik, Dani, and Arvind Subramanian. 2008. “Why Did Financial Globalization Disappoint?”. Abstract
As Fischer had prophesied, there has been an explosion in empirical studies on the consequences of financial globalization. But far from clinching the case for capitalaccount liberalization, these studies paint quite a mixed and paradoxical picture.3 Kose, Prasad, Rogoff, and Wei (2006, hereafter KPRW), who provide perhaps the most detailed and careful review of the literature, conclude that the cross-country evidence on the growth benefits of capital-account openness is inconclusive and lacks robustness. They argue that one should look for the gains not in enhanced access to finance for domestic investment, but in indirect benefits that are hard to detect with macroeconomic data and techniques (an argument which we will evaluate below). In another paper, Kose, Prasad and Terrones (2003) find that consumption volatility actually rose (relative to output volatility) in emerging market economies during the current era of financial globalization—a finding that flatly contradicts theoretical expectations. Perhaps most paradoxical of all are the findings of Prasad, Rajan, and Subramanian (2007, hereafter PRS) and Gourinchas and Jeanne (2007), which throw cold water on the presumed complementarity between foreign capital and economic growth: it appears that countries that grow more rapidly are those that rely less and not more on foreign capital; and in turn foreign capital tends to go to countries that experience not high, but low productivity growth.
Rodrik, Dani. 2008. “Normalizing Industrial Policy”. Abstract
The theoretical case for industrial policy is a strong one. The market failures that industrial policies target—in markets for credit, labor, products, and knowledge—have long been at the core of what development economists study. The conventional case against industrial policy rests on practical difficulties with its implementation. Even though the issues could in principle be settled by empirical evidence, the evidence to date remains uninformative. Moreover, the conceptual difficulties involved in statistical inference in this area are so great that it is hard to see how statistical evidence could ever yield a convincing verdict. A review of industrial policy in three nonAsian settings—El Salvador, Uruguay, and South Africa—highlights the extensive amount of industrial policy that is already being carried out and frames the need for industrial policy in the specific circumstances of individual countries. The traditional informational and bureaucratic constraints on the exercise of industrial policy are not givens; they can be molded and rendered less binding through appropriate institutional design. Three key design attributes that industrial policy must possess are embeddedness, carrots-and-sticks, and accountability.
Also published as a Commission on Growth and Development Working Paper No. 3, Washington, DC, 2008.
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Rodrik, Dani. 2008. “Second-Best Institutions”. Abstract

The focus of reforms in the developing world has moved from getting prices right to getting institutions right. This reflects the recognition that markets are unlikely to work well in the absence of a predictable and legitimate set of rules that support economic activity and dispense its fruits. "Governance reforms" have become the buzzword for bilateral donors and multilateral institutions, in much the same way that liberalization, privatization and stabilization were the mantras of the 1980s.

But what kind of institutions should reformers strive to build? It is easier to list the functions that good institutions perform than it is to describe the shape they should take. Desirable institutions provide security of property rights, enforce contracts, stimulate entrepreneurship, foster integration in the world economy, maintain macroeconomic stability, manage risk-taking by financial intermediaries, supply social insurance and safety nets, and enhance voice and accountability. But as the variety of institutional forms that prevail in the advanced countries themselves suggests (Richard Freeman 2000, Peter Hall and David Soskice 2001), each one of these ends can be achieved in a large number of different ways (Dani Rodrik 2007).

Poor countries become rich not by following in suit of their predecessors but rather by overcoming their own highly specific constraints. While economic globalization can be a boon for countries that are trying to dig themselves out of poverty, success usually requires following policies that are tailored to local economic and political realities rather than obeying the dictates of the international globalization establishment. One Economics, Many Recipes shows how successful countries craft their own unique growth strategies and what other countries can learn from them.
2007
I provide evidence that undervaluation (a high real exchange rate) stimulates economic growth. This is true particularly for developing countries, suggesting that tradable goods suffer disproportionately from the distortions that keep poor countries from converging. I present two categories of explanations as to why this may be so, focusing on (a) institutional/contractual weaknesses, and (b) market failures. A formal model elucidates the linkages between the level of the real exchange rate and the rate of economic growth.
When future economic historians write their textbooks, they will no doubt marvel at the miraculous turn the world economy took after 1950. Over the long stretch of history, neither the Industrial Revolution nor the subsequent economic catch-up of the United States and other “western offshoots” looks as impressive (Figure 1). The period since 1950 has witnessed more rapid economic growth than any other period before, with only the classical gold standard era between 1870 and 1913 coming close. Even more striking, there has been a quantum jump in the growth rate of the most rapidly growing countries since 1950. Prior to 1950, growth superstars experienced growth rates that barely surpassed 2 percent per annum (in per capita terms) over long stretches. Compare this with the post-1950 growth champions: Japan, South Korea, and China; each grew at 6-8 percent per annum during 1950-73, 1973-90, and 1990-2005, respectively. Even allowing for the shorter time slices, this indicates that the world economy became a much more enabling environment for economic growth after 1950. Clearly, the architects of this new world economic system got something right.
Rodrik, Dani, Ricardo Hausmann, and Jason Hwang. 2007. “What You Export Matters”. Abstract
When local cost discovery generates knowledge spillovers, specialization patterns become partly indeterminate and the mix of goods that a country produces may have important implications for economic growth. We demonstrate this proposition formally and adduce some empirical support for it. We construct an index of the "income level of a country’s exports," document its properties, and show that it predicts subsequent economic growth.
2006
Proponents and critics alike agree that the policies spawned by the Washington Consensus have not produced the desired results. The debate now is not over whether the Washington Consensus is dead or alive, but over what will replace it. An important marker in this intellectual terrain is the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform (2005).With its emphasis on humility, policy diversity, selective and modest reforms, and experimentation, this is a rather extraordinary document demonstrating the extent to which the thinking of the development policy community has been transformed over the years. But there are other competing perspectives as well. One (trumpeted elsewhere in Washington) puts faith on extensive institutional reform, and another (exemplified by the U.N. Millennium Report) puts faith on foreign aid. Sorting intelligently among these diverse perspectives requires an explicitly diagnostic approach that recognizes that the binding constraints on growth differ from setting to setting.
2005
Rodrik, Dani, Arvind Subramanian, and Nancy Birdsall. 2005. “How to Help Poor Countries”. Abstract

The year 2005 has become the year of development. In September, at the UN Millennium Summit meeting of heads of state, in New York, leaders of wealthy nations will emphasize their commitment to deeper debt relief and increased aid programs for developing countries. The Millennium Development Goals, the centerpiece of the conference’s program, call for halving the levels of world poverty and hunger by 2015.

The summit will focus on increasing international aid to 0.7 percent of donors’ gross national product to finance a doubling of aid transfers to especially needy areas, particularly in Africa.With respect to global trade, efforts will center on the Doha Round of multilateral trade negotiations and opening markets to important exports (such as cotton) from developing countries. The discussions will thus proceed based on two implicit but critical underlying assumptions: that wealthy nations can materially shape development in the poor world and that their efforts to do so should consist largely of providing resources to and trading opportunities for poor countries.

2004

We analyze the interplay of policy reform and entrepreneurship in a model where investment decisions and policy outcomes are both subject to uncertainty. The production costs of non–traditional activities are unknown and can only be discovered by entrepreneurs who make sunk investments. The policy maker has access to two strategies: "policy tinkering," which corresponds to a new draw from a pre–existing policy regime, and "institutional reform," which corresponds to a draw from a different regime and imposes an adjustment cost on incumbent firms. Tinkering and institutional reform both have their respective advantages. Institutional reforms work best in settings where entrepreneurial activity is weak, while it is likely to produce disappointing outcomes where the cost discovery process is vibrant. We present cross–country evidence that strongly supports such a conditional relationship.

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Rodrik, Dani. 2004. “Getting Institutions Right”. Abstract

A user's guide to the recent literature on institutions and growth.

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We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross–national dataset into two sub–samples: (i) colonies versus non–colonies; and (ii) continents aligned on an East–West versus those aligned on a North–South axis. We exploit the difference in the structural variances in these two sub–samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.

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