Globalization needs strong internal institutions

by Chakravarthi Raghavan

GENEVA: Developing countries which adopt an external strategy of opening up to the world, but without an internal strategy of institutional reforms, "risk exposing themselves to the kind of protracted crises from which many of them have begun to recover only recently", according to Professor Dani Rodrik, professor of International Political Economy at the Kennedy School of Government at Harvard University.

Rodrik was delivering the eighth Raul Prebisch lecture at UNCTAD and was speaking on "Globalization, Social Conflict and Economic Growth".

The Harvard academic, while differing from the Fund/Bank and other neo-liberal assessments since 1980s about the reasons for failure of development in many developing countries, in effect did no more than advance in a different language, the talk of social safety nets, the 60-60 vision (of the Social Summit) as a substitute for international policy failures, and the latest Fund/Bank doctrines which blame the failures of their structural adjustment programmes on governance and transparency of decision-making in countries, and are making this their new agendas.

Rodrik made no reference to the international dimensions of the issues of globalization, whether a process that inherently seems to create internal and external tensions and conflicts is sustainable through mere national actions; nor did he explain how or where the developing countries, in the pursuit of the domestic strategies suggested by him, could find the human and material resources needed - whether for better judicial administrations or social safety nets.

He disagreed with the new conventional wisdom that attributed the development failures in many developing countries to their adoption of the Import Substitution Strategies (ISS) associated with Raul Prebisch, the Argentine economist and first Secretary-General of UNCTAD.

The Harvard professor, author of "Has Globalization Gone Too Far", confessed that until he began preparing for the lecture, he himself had not read Prebisch's writings, though like most development economists of his generation, he knew of Prebisch (and the Prebish-Singer thesis on deterioration of terms of trade for primary products) second-hand.

By the late 1970s, he noted, neo-classical economists were pretty unanimous in condemning the ISS strategy, and blaming "failed development strategies" of the developing countries on this.

However, said Rodrik, having familiarized himself with Prebisch's views, it was clear that Prebisch had not been an advocate of indiscriminate protection and had clearly anticipated (in 1959) that trade protection on its own would not lead to productivity in manufactures, but could even result in the opposite.

Looking at the development performance of a range of countries from the 1960s, Rodrik had difficulty in agreeing with the current conventional wisdom. The development community, he suggested, had internalized the wrong lessons from the experience of countries that had adopted the ISS in Latin America and elsewhere.

Correct interpretation of ISS experience

The correct interpretation of that experience would be:

  • First, ISS had worked rather well for a period of two decades, having brought unprecedented economic growth to scores of countries in Latin America, Middle East, North Africa, and even to some in sub-Saharan Africa;

  • Second, when the economies of these countries began to fall apart in the second half of the 1970s, it had very little to do with ISS policies per se or the extent of government interventions. Rather, countries that weathered the storm were those in which governments undertook the appropriate macro-economic adjustments - in the areas of fiscal, monetary and exchange- rate policy - rapidly and decisively;

  • Third, and more fundamentally, success in adopting these macro-economic adjustments was linked to deeper social determinants - ability to manage domestic social conflicts triggered by the turbulence of the world economy during the 1970s that made the difference between continued growth and economic collapse.

Countries with deeper divisions and weaker institutions of conflict management experienced greater economic deterioration in response to external shocks of the 1970s, the Harvard economist said, citing the adjustment experiences of Turkey and Brazil on the one hand, and South Korea on the other.

Though he presented the East Asian countries as having done a better job of governance, tackling corruption and ability to manage domestic social conflicts, as compared to Latin America, it would be difficult for those following the current unfolding of the Korean history of the recent past, that they had better governance or mediated successfully between the different social sectors.

And it ducked the entire issue of whether the nature of the globalization process itself is creating and accentuating the internal conflicts and tensions within countries.

The main difference between Latin America and East Asia was not that Latin America had remained closed and isolated, while East Asia had integrated itself into the world economy, but that the former did a much worse job of dealing with the turbulence emanating from the world economy.

"It is not openness per se that matters as to how well you handle it," Rodrik said.

In looking at the evidence of per capita growth and total factor productivity growth for a range of some 50 countries since 1963, Rodrik argued that social conflicts and their management, whether successful or not, had played a key role in transmitting effects of external shocks on to economic performance.

In societies with deep social cleavages and weak institutions of conflict management, the economic costs of exogenous shocks - such as deterioration in terms of trade - were magnified by distributional conflicts that were triggered.

Countries that experienced the sharpest drops in GDP growth after 1975 were those with divided societies and weak institutions of conflict management. The severity of the external shocks themselves is distinctly secondary as a determinant of cross-country differences in growth across periods.

If the once latent social conflict and the quality of conflict management institutions were taken into account, "we find that various measures of government policy at the outset of the crisis, such as openness to trade or government consumption, contribute practically nothing to explaining economic performance after 1975, relative to the earlier period."

In drawing from past experience, some lessons for the future, Rodrik said that the main message he took from the evidence of performance of countries was that "it is not whether you globalize that matters, it is how you globalize."

The world market is a source of disruption and upheaval as much as it is an opportunity for profit and economic growth, Rodrik said, but thought (in a footnote) that the recent UNCTAD report on the adverse distributional effects of globalization to be the most pessimistic, preferring the more optimistic views of Robert Lawrence and Jagdish Bhagwati.

However, the Harvard academic did not explain his point. Other economic experts have noted that Bhagwati, for example, to reach the more optimistic view of distributional effects, had done so only by virtually abandoning the factor price equalization theory (on the ground of the too exacting data now needed).

Without complementary institutions at home - in areas of governance, judiciary, civil and political liberties, social insurance and education - there were too much of the risks of disruption and upheaval by exposure to the world markets, and too little of opportunity for profit and economic growth.

"This weakness (responsible for the post-1973 failures) still persists."

Internal strategy of institutional reform

Reforms in the areas of macro-economic policy, trade policy, deregulation and privatization have not been matched by deeper reforms of political institutions, bureaucracies, judiciaries and social safety nets. Meanwhile, the world economy has hardly become a safer place. This leaves developing countries highly vulnerable.

"Without an internal strategy of institutional reform to complement the external strategy of opening up, they risk exposing themselves to the kinds of protracted crises from which many of them have begun to recover only recently."

The three components of an internal strategy in his view were:

  • improving the credibility of the State apparatus by supplementing progress on the macro-policy front with improvement in the quality of the judiciary and public bureaucracy, rooting out corruption, and the State playing an honest broker-role in mediating social conflict;

  • improving the mechanisms of voice, including for the views of non-elites (indigenous peoples, workers and farmers and so on) to be heard and their representatives brought into the decision-making councils; and

  • improving social safety nets and social insurance to prevent people "from falling through the cracks" created by market-oriented reforms.

Rodrik conceded that how to accomplish these things needed much more thought and a fair bit of institutional innovation. But it was necessary to recognize that globalization required strong institutions at home and "in the absence of such institutions, globali-zation is likely to foster domestic social conflicts which are damaging not only in their own right, but are also detrimental to economic growth in the long run." (SUNS4083)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS)from which the above article first appeared.