Development optimism from Justin Lin: review of ‘The Quest for Prosperity’

‘Every developing country has the opportunity to grow at over 8% a year for 20-40 years, and to get rid of poverty within a generation.’ There’s something very refreshing about listening to East Asian development economists, in this case the prolific Justin Lin, a former World Bank chief economist, launching his new book The Quest for Prosperity, at ODI just before Christmas. The contrast between his can-do optimism and the dark clouds of Eurogloom and Afropessimism could not have been greater. But is he right?

While others in development wonkland are increasingly scathing about blueprints and best practice guidelines, Justin is unabashedly a man with a plan. The book takes his paper on ‘Growth identification and facilitation’, (see my earlier review, and Justin’s reply), and boils his thinking down into what he calls a ‘six point recipe’ for developing country governments.

1. ‘Choose the right target’:  find a country that looks like you in terms of ‘endowments’ – geography, natural resources, markets etc, but that is doing much better, with a per capita income that is, say, double yours. Then imitate it. This is a straight lift from Asian ‘flying geese’ story.
2. ‘Remove binding constraints’: identify which of your own industries look like those in the target countries and find out what’s holding them back (infrastructure, credit, red tape etc). Sort those things out first. Justin draws heavily on Dani Rodrik and Ricardo Hausmann’s work on growth diagnostics.
3. ‘Seduce and attract Global Investors’: Justin goes for Washington Consensus-style openness to FDI, along lines of Bangladesh or Singapore rather than the more protectionist route followed by South Korea and others
4. ‘Scale up self-discoveries’: But he also thinks governments need an active industrial policy to spot and support local innovation and technological upgrading (eg Indian IT or cut flowers in Ethiopia)
5. ‘Recognize the Power and Magic of Industrial Parks’: he won’t make many friends among the trade unions on this one, but (drawing on China and Vietnam), he sees export-processing zones as the best way to overcome dilapidated infrastructure and get exporting quickly
6. ‘Provide limited resources to the right industries’:  a tentative support for an activist industrial policy

What this amounts to is an attempt to mash together elements of the structuralism of the 1950s, the East Asian experience, new thinking from people like Rodrik and Hausmann, and the Washington Consensus of the 1980s, not so much splitting the difference as combining the best bits of all of them. It’s politically cautious, trying to play to both sides of the aisle (for example, he says his recipe is ‘consistent with The East Asian Miracle’, the World Bank’s notorious and largely discredited attempt to rewrite the East Asian tigers as a neoliberal success story).

The ensuing discussion at ODI was pretty critical, although Justin defended his recipe with passion. ODI’s Dirk van de Velde argued that it’s no good having a good recipe if you don’t have any cooks. Justin is much stronger on the economics than the politics, and ‘assumes a tin opener’ in the shape of an effective state both willing and able to implement his recipe. That’s a big assumption. When challenged he is pretty naive on the politics, arguing that leaders will be motivated to do the right thing because they want ‘a good name in history’. Yeah, right.

Kunal Sen from Manchester argued that the political economy of growth accelerations is very different from growth maintenance. Lots of political regimes produce growth spurts followed by busts, very few can keep it going for Justin’s ‘20-40 years’ and we need to understand better why that is.

Sheila Page stressed the limits to imitation: as the technological product cycle grows ever shorter, it is becoming less viable to rely simply on imitation, because the technology will already have moved on by the time you have absorbed the knowledge. No good arriving ten years late with a really cheap fax machine.

What about finance? I wasn’t clear from Justin’s presentation what role he sees for financial integration, given that financial markets are sources of huge volatility, put pressure on economic policy-makers to follow a more free market route, and often don’t lend to the right people (eg small and medium enterprises).

Is this a genuine recipe, or does it always rely on hindsight? I asked Justin if he would have predicted in the 1960s that South Korea had a ‘latent comparative advantage’ in iron and steel. He said yes, but I have my doubts.

Beyond these concerns, I applaud the intention, but worry that the attempt is flawed on two fronts. Firstly, I share the general scepticism on blueprints, and secondly, I’m not sure it’s actually possible to mix and match such opposing schools of thought in this way.

As for the book, it’s very sweetly written, and dotted with great quotes. My favourite is from Einstein, ‘Theory is when you know everything but nothing works. Practice is when everything works, but nobody knows why. We have put together theory and practice: nothing is working, and nobody knows why.’

Can democracies kick the growth habit? A debate with Tim Jackson

Last month I spent an enjoyable hour debating zero growth with Tim Jackson in his back garden, for a slot in the July issue of New Internationalist magazine. Tim is the UK’s first Professor of Sustainable Development (at Surrey University) and author of the excellent Prosperity Without Growth (reviewed here).

We largely went over the ground covered in previous posts on his work: Total global carbon emissions = GDP multiplied by grams of carbon per $ of output. To reduce emissions you either improve the carbon efficiency of the economy (fewer grams per $, known as ‘decoupling’), or accept a reduction in GDP, or both.

But Tim reckons that decoupling growth from carbon emissions at the required speed isn’t going to happen, so if we are to avoid catastrophic climate change, the rich countries will have to move to a post-growth paradigm, not least in order to make room for poor countries to keep growing. The justification for the different approaches in rich v poor countries is that, once you get past a certain level of GDP, growth delivers diminishing returns in terms of well-being.

degrowth in action?

Tim argues that zero or negative growth is not possible in the current system, not least because firms compete to increase productivity, and finance and investment restlessly seek profits based on productivity, and as productivity rises, you have to grow to soak up the newly unemployed. Because of this, growth is like a bicycle – if it stops, you fall off (my analogy, not his). His answer is a broad brush shift away from the emphasis on consumption, and a new model of investment that recognizes environmental constraints on economic activity.

We kicked around some ideas for how this might happen, drawing analogies with other parts of the economy. Carbon accounting systems would have to be developed in a way similar to financial accounting; firms would be required to manage climate risk, for example paying higher taxes on emissions over a certain level.

But what struck me most was when we got onto the political system needed to deliver what is at least in part a war economy, with a centrally agreed figure for total carbon emissions (and usage of other finite environmental goods). Such an economy would require a combination of carbon markets  and hard and soft regulation (eg rationing, prohibiting some kinds of technology, or debt-driven industrial expansion; penalties for excess carbon emissions; mandatory carbon emissions accounting).

Politics becomes far harder in a zero or negative growth economy. In a growing economy, everyone can have a larger slice of pie; in a static economy your gain is someone else’s loss and distributive conflicts are bound to rise. Tim sees growth as necessary for political as well as economic stability under the current system. No wonder that politicians routinely dismiss any talk of limiting growth.

Collective action problems would also abound – if one firm or country decided to go for zero growth, for example by stopping investing in new technologies, but other firms continued to do so, they would rapidly gain a competitive edge and push the others out of business. At an international level you would require enforceable coordination mechanisms to a far higher degree than currently exists – something close to global government, in fact.

Which leaves me with the nagging question, ‘are democracy and individual rights compatible with the ‘managed contraction’ of the economy?’ I was left thinking that the systemic obstacles to zero growth are at least as great as those preventing a drastic acceleration of technologies to decouple production from emissions, e.g. through the launch of 20 Manhattan Projects. And both would require a far higher centralization of power.

My conclusion? A successful long-term containment of climate change will come through a combination of partial decoupling, perhaps driven by big climate shocks, and maybe combined with fragmented shifts to a post-growth paradigm, but it will be very messy indeed and may not look very democratic.

In the end we agreed on an unlikely combination of Sherlock Holmes and Antonio Gramsci – ‘When you’ve eliminated the impossible, then whatever’s left, however improbable, has to be the truth’, and ‘I’m a pessimist because of intelligence, but an optimist because of will’.
 
And as always, it’s far easier to pick holes in other people’s arguments than provide solutions of your own, but it’s important to think through the politics of these kind of big new ideas. I would dearly love to be convinced that zero growth is both achievable and compatible with human rights – over to you.