Robert Wade on De-Neoliberalizing the World Bank

♠ Posted by Emmanuel in ,, at 2/08/2011 12:02:00 AM
Here's yet another interesting article from the new LSE house journal Global Policy. It all started in the second issue of this publication when Robert Wade, a famously "heterodox" economist in our development department, envisioned post-crisis options for developing states. In particular, he mentioned possibilities for something the World Bank has long disdained--industrial policy--correcting the belief that markets are self-obviously superior to states in such areas as disseminating information, determining prices, and allocating resources.

Well, the global financial crisis seems to have broken faith in these "neoliberal" beliefs. After all, a characteristically hypocritical North American nation fond of preaching the gospel of deregulation, liberalization, and privatization as the keys to economic heaven for errant developing countries suddenly began an unprecedented regime of reregulation (of financial services providers), deliberalization (of securities trading), and nationalization (of automakers and banks) when faced with its own crisis. Who's got "national champions" now, white man? Your industrial policy looks a lot like ours--but is far more encompassing in scale and scope. The picture to the right is the Storm Thorgerson-designed cover of Mars Volta's De-Loused in the Comatorium. While not my favourite listen, it may be an apt metaphor for what's happening with the excesses of neoliberalism--delousing subprime globalization as the Washington Consensus is left for dead.

It should thus be mentioned that no small amount of gloating has also emerged from those like Robert Wade and Ha-Joon Chang who've long argued for a more active role for states. To make a long story short, Justin Lin--the first non-G7 chief economist at the World Bank--did not disagree as much as you'd expect with Wade in his succeeding article in Global Policy. Rather, Lin had qualifiers on the extent to which industrial policy should be practised and under what circumstances. In turn, Wade has just issued his comment on Lin's reply. While it's true that the World Bank now has less influence over developing countries--again, many receive much more in the form of workers' remittances than official development aid provided by institutions like the Bank--its relaxation of a hardline market approach as represented by Lin's softer position represents a gradual meeting of minds according to Wade:

Here are a few directions in which some vigorous pushing is needed, whether by the World Bank or others. First, on the supply side, is the distinction between ‘existing comparative advantage’ and ‘future’ or ‘latent’ or ‘dynamic’ comparative advantage. Most of the time Lin wishes to limit ‘interventions’ to helping firms exploit the opportunities offered in the existing comparative advantage – with the qualification that ‘economic development is a dynamic process that requires industrial upgrading’, a dynamic process that may change the existing comparative advantage and in which the government may have an important coordinating role. I wonder how to operationalize the distinction between existing and latent comparative advantage. Lin suggests that government and firms in country X should scrutinize the kinds of products and services produced in comparably endowed countries with per capita incomes roughly double X’s, and look for promising items or processes within this set. Indeed, Japanese, Korean and Taiwanese planners did do a lot of this ‘looking ahead down the river’ kind of exercise. But they often took target countries much more than twice as rich as they were at the time. And today, more than when the capitalist East Asians went through their fast-growth decades, there is more ‘vertical’ differentiation in the production of any one product, creating niches in the production of final products which, as final products, appear to be far beyond the ‘latent’ comparative advantage of country X (see my Governing the Market (Wade, 2004)).

This line of thinking invites serious attention to the rather neglected subject of industrial upgrading and diversification, including to the concept of stages of growth. It is remarkable how ideas about the transition from resource-based industries (for example, textiles and apparel) to heavy and chemical industries, to scale-sensitive assembly-based industries like automobiles and electronics, to Internet-based industries (all with very different appropriate roles of government) have largely disappeared from development economics. Here it is worth going back to the seminal work of the Japanese economist Akamatsu and his flying-geese theory of intra-industry evolution within one national economy and linked flying-geese theory of inter-country evolution in a hierarchical division of labor. Akamatsu published his main work before the Second World War. There is no better place to understand his arguments and see their application to development patterns of the past several decades than Terutomo Ozawa’s important new book, The Rise of Asia: The ‘Flying-Geese’ Theory of Tandem Growth and Regional Agglomeration (2009). Much of Lin’s thinking resonates with that of Akamatsu and Ozawa.

Another big hole in conventional development economics, which Lin and the World Bank could help to give more attention to, is on the demand side – above all, the tendency for wages to increase more slowly than productivity growth, which limits domestic demand and concentrates income and wealth at the top, distorting the economy by the efforts of the wealth holders to find ways to store their wealth (in natural resources, complex financial products, overseas bank accounts, political patronage). The World Bank could give its support to Rooseveltian measures like a legal minimum wage, cash transfers to the poor and guaranteed public sector employment at the minimum wage. The trouble is that its [Country Policy and Institutional Assessment] formula hard-wires in the assumption that a completely free, ‘undistorted’ labor market with virtually no worker protections is the ideal labor market for development. This needs to change.

A third – and for present purposes final – big hole in conventional development economics concerns the strong advantages of mobilizing domestic savings, as distinct from relying on foreign borrowing. For too long economists have presumed that foreign saving will help to raise domestic investment, downplaying its dangers – a presumption indirectly derived from the interests of western financial firms. No one was more adamant – and one eyed – about the need for free capital flows and for developing countries to borrow abroad to supplement domestic savings than Larry Summers, during and after his tenure as chief economist of the World Bank. One of the most eloquent arguments about the need for and methods for boosting domestic savings is set out by the Brazilian economist Luiz Carlos Bresser Pereira, in Globalization and Competition: Why Some Emergent Countries Succeed while Others Fall Behind (2010).

IMHO, the intellectual terrain has shifted from "Should countries be allowed to use industrial policy?" to "How can industrial policy be gainfully applied?" While I still have some trouble with some of Wade's ideas (and Chang's for that matter), let's say we agree that Larry Summers is...not so great. Still, I'd certainly like to see examples other than Asian tigers being cited. If industrial policy can be made to work, then certainly there are other countries who've applied it to good effect, right?