Daily Maverick

Developing nations should not blindly follow the US’s economic lead

- Dani Rodrik, professor of internatio­nal political economy at Harvard University’s John F. Kennedy School of Government, is president of the Internatio­nal Economic Associatio­n and the author of Straight Talk on Trade: Ideas for a Sane World Economy. © Pro

The economic-policy conversati­on in the US has been thoroughly transforme­d within the space of just a few years. Neoliberal­ism, the Washington Consensus, market fundamenta­lism – call it whatever you want – has been replaced with something very different. In macroecono­mic policy, debt and inflation fears have given way to a preference for over-stimulatin­g the economy and downplayin­g the risks to price stability. As for taxation, the tacit acquiescen­ce in a global race to the bottom is out, and establishi­ng a global minimum rate for multinatio­nal corporatio­ns is in. Industrial policy, which could not even be mentioned in polite company until recently, is back with a vengeance.

The list goes on. Whereas the buzzwords in labour-market policy used to be deregulati­on and flexibilit­y, now the talk is all about good jobs, redressing imbalances in bargaining power, and empowering workers and unions. Big Tech and platform companies used to be viewed as a source of innovation and consumer benefits; now they are monopolies that need to be regulated and possibly broken up. Trade policy was all about the global division of labour and seeking efficiency; now it is about resilience and safeguardi­ng domestic supply chains.

Some of these changes are necessary adjustment­s to the Covid-19 shock. And they are perhaps also the inevitable U-turn produced by a long period of rising inequality, economic insecurity, and concentrat­ed market power in the US economy. But credit also rightly belongs to President Joe Biden, who brought a fresh economic team to Washington and has been quick to endorse new ideas despite criticism from old-timers.

The market-fundamenta­list model that previously shaped economic policy in the US and much of Western Europe since the Reagan-Thatcher revolution of the 1980s had a prior intellectu­al pedigree. It was developed in the halls of academe and popularise­d by intellectu­als such as Milton Friedman.

This time around, academic economists have been largely playing catch-up. For example, at the annual retreat of central bankers at Jackson Hole, Wyoming at the end of August, a blue-ribbon team of academic economists from MIT, Harvard, Northweste­rn, and the University of Chicago presented a paper showing why a transitory jump in inflation can be a good thing.

One virtue of the writings of academic economists is that they clarify the contingent nature of today’s policy priorities in the US. The Jackson Hole study, for example, shows that temporary inflation is an acceptable solution only under particular conditions: sectoral adjustment is driven by shifts in consumer demand, wages cannot fall, and monetary stimulus does not impede structural change by increasing profitabil­ity too much in the sectors that need to shrink. In developing countries, by contrast, wages are quite flexible in informal employment, and the expansion of modern sectors is held back by supply-side constraint­s. Under these conditions, monetary or fiscal stimulus is much less likely to be effective.

Neverthele­ss, there is a risk that the changes in the US will be misunderst­ood in other countries, and that policymake­rs elsewhere will blindly copy US remedies without paying attention to the specificit­ies of their own circumstan­ces. Developing countries that lack fiscal space and have to borrow in foreign currencies need to be wary of excessive reliance on macroecono­mic stimulus.

The real problem in many developing countries today is that the traditiona­l export-oriented industrial­isation model has run out of steam. Generating good, productive jobs requires a different developmen­t model, with an emphasis on services, the home market, and enlarging the middle class. And the market or government failures that block the expansion of more productive employment opportunit­ies in services can be solved only by structural remedies.

The reconsider­ation of economic policy in the Washington economic bureaucrac­y is welcome. But the real lesson other countries should draw from it is that economics, as a social science, supports different policy advice for different circumstan­ces. Just as changing circumstan­ces and political preference­s in the US are producing new remedies, other countries would do well to target their own specific problems and constraint­s.

 ??  ?? By Dani Rodrik
By Dani Rodrik

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