Let a thousand economic growth models bloom

Dani Rodrik, Professor of Political Economy, John F. Kennedy School of Government, Harvard University, Project Syndicate

Over recent decades a simplistic view about the fundamentals that govern the theory and practice of development has taken root. Stated nakedly, this view holds that growth requires two things: Foreign technology and good institutions. Failure to grow can be attributed to either (or both) of two pathologies. Call one the "protection" pathology, in which governments stymie progress by reducing access to foreign investment and technology. The other pathology is "corruption," where political leaders fail to respect property rights and the rule of law.

The natural remedies for these pathologies are claimed to be economic openness and improved governance. Reforms focused on governance and openness thus became the cornerstones of development strategy in virtually every country during the last fifteen years.

Experience presents an awkward fit (at best) with this conception. Consider Latin America, where there has been greater enthusiasm for the so-called "Washington Consensus" on growth than in any other corner of the world. By the standards of the consensus view, policymaking in Latin America was better in the 1990s than ever before, nonetheless few countries in the region grew faster than in the period before 1980.

Or consider more successful countries. Some of the most important -- South Korea and Taiwan since the early 1960s, China since the late 1970s, India since the early 1980s -- have done extremely well under heterodox arrangements. All emphasized exports; none grossly violated property rights. Their strategies bear only passing similarity to today's consensus.

South Korea and Taiwan retained high levels of protection for a long time, and made active use of industrial policies. China's reforms are marked by partial liberalization, two-track pricing, limited deregulation, financial restraint, an unorthodox legal regime, and the absence of clear private property rights. India barely reformed its cumbersome trade and industrial regime before its economy took off in the 1980s.

These and other success stories share one thing: They are instances of growth strategies that combine orthodoxy with local heresies -- unconventional institutional innovations that relax constraints on growth at least cost to the social and political fabric. Of course, heterodoxy does not always produce payoffs. Most countries with protected economies and lax protection of property rights languish. But the fact that some of the world's most successful economies prospered while doing things that are not in the rule-book is something that cannot be dismissed easily.

To grasp the conventional view's deficiencies, begin with the problem of technology adoption. Learning what a country is (or can be) good at producing is a key challenge. Neither economic nor management theory is of much help in helping entrepreneurs (or the state) choose appropriate investments among the range of modern-sector activities. Yet making the right investment decisions is essential to growth, because they determine the pattern of specialization.

Today's intellectual property regime protects innovators in advanced countries by issuing temporary monopolies, i.e., patents. But the investor in the developing country who figures out that an existing good can be produced profitably at home and sets up a model for others to emulate does not normally get such protection, even though the social returns can be high.

Laissez-faire is not the optimal solution here, just as it is not in the case of research and development of new products. Desirable government policy consists of a carrots and stick: Encouraging investment and entrepreneurship in the modern sector ex ante, but, equally important, rationalizing production and driving out poor performers ex post.

Institutional arrangements also have large elements of specificity. Discovering which institutions are suitable to local conditions requires experimentation. Reforms that succeed in one setting may do poorly or fail in other settings. Two-track reform worked well in Deng's China but not in Gorbachev's Soviet Union. Import-substitution fostered competitive industries in Brazil, but not in Argentina. Gradualism may be appropriate to India, not Chile.

Specificity helps explain why successful countries -- China, South Korea, Taiwan, and Chile among others -- usually combine unorthodox elements with orthodox policies. It may also account for why important institutional differences persist among advanced countries in areas such as the public sector's role, the nature of legal systems, corporate governance, financial markets, labor markets, and social insurance mechanisms.

It is not that economic principles work differently in different places, or need to be tailored to local conditions. An important distinction between economic principles and their institutional embodiment is that most key economic principles are institution-free.

Incentives, competition, hard-budget constraints, sound money, fiscal sustainability, property rights are central to the ways in which economists think about policy and its reform. But these principles do not demand specific institutional solutions. Property rights can be implemented through common law, civil law, or, for that matter, Chinese-style socialism. Competition can be maintained by a combination of free entry and laissez-faire, or by a well-functioning regulatory authority. Macroeconomic stability can be achieved under a variety of fiscal institutions.

Because policymakers operate in second-best environments, optimal reform trajectories -- even in apparently straightforward cases such as price reform -- cannot be designed without due regard to prevailing conditions and without weighing the consequences for multiple distorted margins.

Neither technology nor good institutions can be acquired without significant domestic adaptations. Those adaptations require a pro-active role for the state and civil society, and collaborative strategies that foster entrepreneurship and institution building. What the world needs right now is less consensus and more experimentation in the service of such strategies.