Dani Rodrik on the Future of Development and Globalization

October 24, 2008

The globalized economy presents both challenges and opportunities for developing countries. While some developing economies have rapidly expanded in recent decades, others have remained stagnant, unable to leverage the human capital, natural resources and/or industrial capacity necessary to move forward. Dani Rodrik is Rafiq Hariri Professor of International Political Economy, and well renowned for his work in the areas of economic development, international economics, and political economy.

Q: You have written that an “alternative conception of globalization…is more likely to maintain an enabling global environment than the path we are on currently.” What is that alternative conception, and how does it differ from the traditional one?

Rodrik:I think we have to understand better that markets require a whole range of public institutions and public regulations to sustain and underpin them to make sure that they generate reasonable outcomes. Furthermore, we need to understand that different nations, different communities have different preferences for the shapes that those public institutions ought to take, and I think that those two points have very important implications about how far we can take economic globalization which economists haven’t typically quite internalized yet.

Q: The current global financial crisis is having tangible impacts on many developed countries. Please discuss how it could impact economies in developing countries.

Rodrik: Unfortunately the emerging markets and developing countries have already been badly affected as we speak. There are basically two main channels: the more immediate one is the financial contagion channel that operates through “a flight to safety” as investors around the world move their investments towards safer assets like U.S. government securities and towards the advanced countries in general.

The longer-term channel is through the impact of the recession in the advanced countries. That essentially means that the export markets tend to shrink and a lot of export-oriented investments that these countries have made – particularly in Asia – tend to suffer.

Q: Some of your recent research has focused on exchange rates and economic growth. Please explain how one impacts the other.

Rodrik: I think the exchange rate, for a developing country, is really the most important single price, because it is the price that determines the profitability of the most important, dynamic sectors of the economy. Those tend to be the tradable sectors, the modern sectors. They tend to be the sectors that generate the technological benefits and growth effects. Therefore countries that tend to maintain an exchange rate that keeps those export-oriented, tradable sectors profitable tend to induce more investments from the private sector and therefore more dynamic benefits, more economic growth.
The most important single example currently is China. For the last 15 years, China has maintained an exchange rate that is highly favorable to its export sector. I think its export successes and its economic growth have greatly benefited from that. This kind of exchange rate policy is good because it generates structural change, structural transformation, which is what these developing countries need most: to get resources from low-productive economic activities towards higher-productivity activities which can serve world markets. And that process of structural transformation is what lies at the heart of the growth process in developing countries. As China’s experience has shown, an undervalued exchange rate can really speed that process up.

Q: The Center for International Development, with which you are affiliated, recently launched the Empowerment Lab to closely examine the limits of market reach. What are the primary challenges that must be overcome in order to increase access to key markets and thereby improve the lives of otherwise underserved populations?

Rodrik: The challenge is that we know what we want to do, but we don’t really have a very good sense of what the best points are for intervention. We know that poor people don’t have access to credit, they don’t have access to health facilities, they can’t or don’t send their children to school and therefore they tend not to get educated and skilled. So there’s a whole set of syndromes associated with poverty. And the fundamental question here is -- are people poor because they don’t have access to credit, because of their health status or their education, or are those things really the consequence of poverty?

This complicated relationship between poverty and its syndromes has to be untangled before we can actually make progress. Because in development we’ve really tried everything –from massive state intervention to massive foreign aid, to massive scale micro-finance, you name it. The issue is that these interactions are fairly complicated and also tend to be fairly context-specific and therefore it’s very hard to go anywhere with very general, blanket recommendations and grand strategies without understanding that the details on the ground are what really differentiates countries and what determines success.

Q. Do you see any backlash against globalization resulting from the global financial upheaval?

Rodrik:I don’t foresee a major backlash or a major reversal. I think the more dangerous thing that’s going to happen once we look beyond the immediate recession, which is going to be very costly, is that there is quite a dramatic dissolution of the intellectual consensus behind the arrangements of globalization and global governance that we had before. Those arrangements really served us very well in the few decades after the Second World War. I think what that is going to lead to is not necessarily a major backlash or an overnight reversal, but a gradual erosion of those principals -- of multilateralism, open economic borders -- that over time could be quite dangerous. So I think the challenge for policy intellectuals, economists and policy leaders is really to reconstruction that intellectual consensus as to what kind of globalization we want, what kind of institutions come with it and how can we reinvent our global economic arrangements. Because they do need reinvention.

Interviewed by Doug Gavel on October 16, 2008.

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