Some Basic Disagreements on Development

Once upon a time I made a list of ten policies which I thought more-or-less everyone in Washington could agree were needed more-or-less everywhere in Latin America. I found a common interpretation of what I had written to be quite extraordinary, indeed largely the contrary of what I was arguing, so rather than try once again to stress the things on which we agree, let me try analyzing the disagreements that I see as most important today. On some of these I have firm views of which side is right, while on others my present views are agnostic, but in all cases I endeavor to present what I see as the basic issues that need to be resolved if dissensus is to give way to consensus.

I discuss five issues on which I see there as being large differences. Two of these, states versus markets and industrial policy, are extremely familiar. A third, the question of whether more undervaluation is necessarily better from a national standpoint, is a relatively new issue for which we can expect a definitive resolution in due course. The fourth issue is also new, the question of whether there is reason to believe in the “middle-income trap”, but may well prove more resistant to a definitive solution. The fifth issue is an old-timer, whether democracy is more or less likely to be supportive of development than dictatorship, on which one should not expect a definitive resolution.

While I would not assert that these are the only issues on which development economists differ, I do believe that they take in a large part of the waterfront.

States versus Markets

Blanchard (2011) wrote: “In the age-old discussion of the relative roles of markets and the state, the pendulum has swung—at least a bit—toward the state.” The assumptions here are twofold: that the state versus market debate can be envisaged in terms of more-or-less rather than either-or, and that the recent crisis has moved us toward the state pole. The former assumption places us in the land of the mixed economy, where I, and I suspect most economists, are comfortable. The latter assumption concerns the direction of movement induced by the crisis: I share his view, although at least one of my colleagues disagrees. One reason for holding this view is that the rapid recovery in China reminded us of an advantage of a large state sector that we overlooked in the non-Keynesian world that preceded the crisis: that it provides government with a powerful additional lever to induce a rapid resumption of growth. Most economists adopt their position on this issue out of a set of basic ideological beliefs. But these beliefs are not immune to evidence. The collapse of the Communist empire, and the evidence that countries with similar starting positions had all lost ground when deprived of the price mechanism (Estonia versus Finland, Czechoslovakia versus Austria, East versus West Germany, North versus South Korea, mainland China versus Taiwan), surely had a big influence in shifting opinion away from the state pole toward endorsement of a market economy. Indeed, it is difficult to think that there is anyone much left at the state pole in view of the abject failure of centrally-planned economies when they had a chance to completely suppress the price mechanism. Similarly, among those who favored a mixed economy to start with, surely there was a move toward the market pole.

Can one envisage an equally clear experiment at the market pole? In principle there is nothing to prevent a country resolving that it is not going to interfere in price-setting in any way, and in practice the Baltic states have come sufficiently close to this pole that their failure would surely have shifted opinion away from the market pole. Their success, particularly in adjusting to the effects of the crisis (see Aslund and Dombrovskis 2011, Blanchard 2012), has had the converse effect.