Dani Rodrik writes:
Why I don’t do political economy any more
In the early part of my academic career, the question that consumed me was: “why don’t governments do what is obviously best for their societies?” Why don’t they not reform their policies, when doing so would increase the overall size of the economic pie? Even if they have other goals than maximizing national income, why do they so often choose more inefficient policies (like trade restrictions) over less inefficient ones (such as direct subsidies)? My Ph.D. dissertation and most of my research in the next 5-7 years focused on trying to answer these kinds of questions.
As I was reading a paper by Raghu Rajan, for which I am the discussant in the annual meetings of the American Economics Association, I realized how much I had moved away from this kind of literature. Raghu’s paper is squarely in that “old” political-economy tradition: it asks why countries do not reform and why underdevelopment persists as a result. His answer is a twist on the traditional story: the problem is not so much a narrow set of elites that want to maintain their rents at the expense of development, but the non-elites who want to maintain theirs. The educated non-elites do not want competition so they veto greater access to education by the non-educated. Meanwhile the non-educated do not want market reforms because this would raise the prices of many of the services they consume (so says Raghu). The result is reform paralysis. Even though Raghu does not say so explicitly, he is obviously thinking of India.
The reason I stopped writing this kind of papers is that I, along with much of the profession (I think), became a lot less convinced that we had the right fix on what the requisite reforms were. If you think you know the answer to what every country needs to do, the interesting question becomes why everybody isn’t already doing it. But if you don’t, you are back struggling with the narrowly economic question of what countries ought to be doing.
In any case, I think the experience of the last quarter century renders the traditional rent-preservation explanation for why reforms are not undertaken difficult to believe. The most successful reforms of the recent past–those in China–were explicitly designed to preserve pre-existing rent streams. If you can get 9% growth while keeping entrenched interests happy, distributive concerns cannot possibly be the problem. And where reformers took on these rents–think of Pinochet’s attack on organized labor and protected industries–the economic result was typically a disaster.
So while traditional political economy accounts surely explain some of the pattern of policy making we observe, I don’t think they take us far in understanding why some countries grow and others don’t. In my book, there are lots of $100 bills left lying on the pavement. The purpose of political entrepreneurs is to pick them up, and that of economists to point out where they are.