“Economics is two parts wonder drug and one part snake oil”

Harvard economist Dani Rodrik in conversation with Governance Now

trithesh

Trithesh Nandan | February 14, 2012




Dani Rodrik, the Rafiq Hariri professor of international political economy at Harvard University, is known as an original thinker on globalisation and economic development in the academic circles. His enriching analyses on globalisation are reflected in newly published book titled ‘The Globalisation Paradox: Why Global Markets, States, and Democracy can’t coexist’.

In an interview with Trithesh Nandan in New Delhi, Rodrik says India needs policies which can work. He, however, added that timing of such policy is crucial for its efficacy. On the current financial crisis, he said economists can’t alone be blamed for the mess. The Harvard professor says that politicians are accountable too. Edited excerpts:

Economists have been receiving flak the world over for the ongoing financial crisis. Can you tell us then what exactly makes good economics?
Good economics is very conscious of context because, economics is collection of different models. Each of them is an approximation of
particular kind of reality. I think  good economics is the craft or the practice of knowing what model to apply depending on the context that you find. Just to give a very relevant example, sometimes when there is full employment, we want to apply classical framework. Sometimes when there is unemployment because of lack of aggregate demand, you want to apply Keynesian model. One of the models is always right and the tricky bit is deciding when to apply which model.

Is this an explanation of why some governments work and some do not? What about India? How do you assess this country that you often visit?
India is a huge country with plenty of variation. There are many interesting variations at the state level. Some state governments are working very well while others are not doing that well. I think there is a lot to learn from that variation. For India, challenges are very big ones. India has done what no country has been able to do, like having a working democracy for so many decades though the country is relatively poor. It is a matter of developing these issues over time and learning from what works and where.

Would you agree with the economists who say that their tribe is to blame for the current mess across the globe? Or are their others you would point fingers at?
I have written in my book that economists and policy advisers have exhibited myopia far too long towards the tension and frailties that economic globalisation generates. Economists are human beings too. They behave as humans do – not as the fictional hyperrational, social welfare – maximising planners that their own models sometimes rely on.
And, of course, politicians have to be held accountable as well. The financial crisis that we are going through is a result of both bad ideas and special interests that hide behind those bad ideas. So, it is a combination of the two. However, I will neither denigrate economists’ ideas, nor be a cheerleader for them. The problem is not that economists are high priests of free market fundamentalism, but they suffer from the same heuristic biases as regular people. They follow fads and fashion, promoting different set of ideas at different times.
In my book, I have mentioned that economics has been two parts wonder drug and one part snake oil. However, we have to contend with a world economy that remains a patchwork in terms of governance.

What is the fundamental problem of the world economy?
There is an imbalance between reach of markets (global) and scope of their governance (mostly national). There is subtle tension between democracy and globalisation. Globalisation can make it easier for national democracies to attain goals they pursue, albeit with some restrictions on policy space. The conflict arises only when globalisation restricts articulation and pursuit of those goals. The balance of global forces is becoming more centrifugal. In fact, there is a political trilemma (sic) of the world economy: that we cannot simultaneously pursue democracy, national self-determination and economic globalisation. If you give too much power to governments, this will only result in protectionism but if you give too much freedom to markets, you have an unstable world economy with little social and political support from those it is supposed to help.

Amartya Sen recently said that developing countries have been doing quite well in the present economic crisis than developed countries. Does this mean that the developing nations are taking more balanced decisions?
If you are doing moderately simple things, it is easier to converge than it is to grow at the frontier. Looking forward, we can expect that many developing countries will be growing more rapidly than the developed countries. That is to be expected.
Markets and governments are complements, not substitutes. If you want more and better markets, you have to have more (and better) governance. Markets work best not where states are weakest, but where they are strong.

Coming to your new book ‘The Globalisation Paradox: Why Global Markets, States, and Democracy Can’t Coexist’, what is the ‘trilemma’ all about?
Because certain kinds of globalisation exert too many restrictions on the ability of the governments to design rules and policies that are responsive to the domestic electorates. That’s why tensions come out. The world economy is not a “global commons”. Democratic politics can “malfunction,” but it is locals who pay bulk of the costs.
So, improved deliberation at home is likely to be more powerful stick than external constraints. Countries have the right to protect their own social arrangements and institutions but this should not be imposed on others.

What about India? Growth has not wiped the tears off the cheeks of the poor. What would be your policy prescription for the country? Has India done enough to tide over the financial crisis?
India is relatively well positioned to deal with the crisis. Inflation is a problem but not that big one. We don’t really know what is happening to poverty, though. There are many different numbers. I don’t want to stick my neck out on that issue. But certainly an economy that is growing at seven or eight percent can generate more resources to be used for anti-poverty programmes. Even if growth directly does not help people at the very bottom of the income distribution scale, it certainly generates enough resources for the public sectors to be able to target the poor and help them directly in ways that they would be unable to do in a low-growth economy.

Do you see an end for the current financial crisis some time soon?
I think the Europe will remain in financial crisis for quite some time in the medium-term. I think the United States will recover quicker even though it will not grow at the pre-crisis level very soon. It will grow below pre-crisis level.

Can you give us a more specific timeline?
A lot of that depends on how the Eurozone crisis is going to work out, that’s going to affect the financial markets and the growth, so it’s hard to know the actual year.

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