A Niggling Conundrum

Is it possible that the message about barriers to development being far more complex than the economics consensus appears to believe is getting through to a wider audience than before? I am not sure but reading some recent contributions on the web I see a glimmer of hope that ideas are circulating that have tremendous significance, if – and it is a big if – these ideas are translated into policies and the policies are applied.

In the Blog, “New Economist, (new economic research, data, events, and analysis from a London-based economist)”, I was scrolling through some of its pages at: http://neweconomist.blogs.com/new_economist/, and found the following extracts from a Professor Rodrik (Harvard) on a World Bank document:

"Rodrik contrasts the World Bank's interpretation of the 1990s with the IMF's, which has increasingly emphasised the importance of institutions and the need for good governance and institutional reform:

What has become clearer to practitioners of the Washington Consensus over time is that the standard policy reforms did not produce lasting effects if the background institutional conditions were poor. Sound policies needed to be embedded in solid institutions.
Moreover, there were significant complementarities across different areas of reform. Trade liberalization would not work if fiscal institutions were not in place to make up for lost trade revenue, capital markets did not allocate finance to expanding sectors, customs officials were not competent and honest enough, labor-market institutions did not work properly to reduce transitional unemployment, and so on. The upshot is that the original Washington Consensus has been augmented by a long list of so-called “second-generation” reforms that are heavily institutional in nature.

The paper also discusses "yet another vision of reform strategy": the United Nations’ Millennium Project, led by Jeffrey Sachs.

The U.N. Millennium Project is based on the view that we basically know enough to mount a bold, ambitious, and costly effort to eradicate world poverty. We have successfully identified all the margins that matter, and we better move on all of them simultaneously. Learning from Reform, by contrast, is an ode to humility. What we have learned, it says implicitly, is the folly of assuming that we know too much. We need to downplay grandiose claims, move cautiously, and concentrate our efforts where the payoffs seem the greatest.

Rodrik outlines "a way of thinking about growth strategies that avoids some of the obvious pitfalls," based on growth diagnostics, targeted policy design, and institionalising reform. There is much good sense here. He concludes:

Learning from Reform is a genuinely interesting document: it represents a mea culpa as well as a way forward. It pushes us to think harder and deeper about the economics of reform than anything else out there. It warns us to be skeptical of top-down, comprehensive, universal solutions—no matter how well-intentioned they may be. And it reminds us that the requisite economic analysis—hard as it is, in the absence of specific blueprints—has to be done case by case. These should be music to any economist’s ears.
I suggest people read the whole book - it is available to download on the World Bank website.

I am going to read further in this area and will report later.

Meanwhile, I am minded of one of those niggling conundrums, which I have long determined I would think about when I have the time, that has always bothered me about something Adam Smith was alleged to have written in 1755, but which was not seen by others besides Dugald Stewart, who quoted from it in 1793, whilst giving the eulogy in memory of Smith to a meeting of the Royal Society of Edinburgh. His son, suffering from mental illness, is believed to have destroyed the paper subsequently.

Smith wrote: ‘little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point are unnatural, and 6to support themselves are obliged to be oppressive and tyrannical.”

This paper is often quoted as Smith’s hymn to free markets (even laissez faire) liberty and justice. However, that is not my niggling conundrum. What bothers me is the thought that humanity has come a long way from barbarism in a few millennia but it has experienced precious few governments of the kind alluded to by Smith and even fewer economic and justice regimes that could be described as he prescribed for the ‘little else’ needed. Indeed, most governments have been tyrannical and oppressive, as the American colonists knew to their pain in 1776.

Popular journalism, and not a few academics, point to the immense progress in alleviating poverty in recent years in state communist China (an oppressive regime by any definition), its sister regime in Vietnam and state dominated India, and before them of the state controlled, protectionist market regimes of Taiwan, South Korea and the slightly less state dominated regimes of Malaysia and Singapore. None of these regimes conform to the conditions set out in the 1755 paper.

I need to give it more thought, but the World Bank and Professor Rodrik may be coming at my conundrum from another direction. I shall continue reading.