Waylaid Dialectic

July 9, 2010

Link Friday

Filed under: Aid,Governance,Institutions,Social Justice,Trade — terence @ 12:13 pm
Tags: , ,

Starting with industrial policy…

At VoxEU Ann Harrison and Andres Rodriguez-Clare make the case for “soft industrial policy”…

…whose goal is to develop a process whereby government, industry, and cluster-level private organisations can collaborate on interventions that can directly increase productivity. The idea is to shift the attention from interventions that distort prices to interventions that deal directly with the coordination problems that keep productivity low in existing or raising sectors. Thus, instead of tariffs, export subsidies, and tax breaks for foreign corporations, we think of programmes and grants to help particular clusters by increasing the supply of skilled workers, encouraging technology adoption, and improving regulation and infrastructure. While “hard” industrial policy is easier to implement than “soft” industrial policy measures, tariffs and subsidies become entrenched and are more easily subject to manipulation by interest groups.

The article is an excellent overview of the industrial policy debate, and their suggestion certainly has appeal. As always though, I’m still not confident that what they’re arguing for could really work in the institutional environment of developing countries, or that it would be any less subject to manipulation by interest groups than traditional industrial policy. Still, well worth a read.

Meanwhile, industrial policy is now on the menu at the World Bank, courtesy of their interesting new chief economist Justin Lin. And at Poverty to Power Duncan Green reviews some of Lin’s suggestions for industrial policy, offering similar concerns about feasibility in less than optimal institutional environments. To which Lin offers a thoughtful response.

Sticking with Oxfam, Oxfam New Zealand, spurred by last year’s Ministerially mandated change of focus to New Zealand’s aid programme (the core focus now being on economic development), have produced a really interesting piece of research [pdf] on what might work in terms of aid for economic development in the Pacific.

Also on the subject of aid, Owen makes an uncharacteristic error in attributing an incorrect figure to William Easterly. And yet the underlying point of his post is correct and bares repeating. The West really, really hasn’t given that much aid to developing countries:

The G-20 countries have, over the whole history of aid, given less aid to sub-Saharan Africa than they spent on fiscal stimulus in the single year of 2009.

Keeping the segues flowing, William Easterly is at least 50 percent correct in his most recent post at AidWatch:

Here’s why direct solutions to problems cannot foster development. Each direct solution depends on lots of other complementary factors, so the solutions can seldom be generalized across different settings; Solutions must fit each local context. Solutions that generate the highest payoff in each setting should be a higher priority than the lowest payoff solutions. Since there is little or no feedback on how well each solution is working in each local situation, there is little possibility for any such adjustments.

Hear, hear.

Where his post falls apart is in it’s extolling of markets and democracy as the best possible means of finding solutions to the complexities of context. The invisible hand is a miraculous allocational tool, and functioning markets have a critical role to play in enhancing human welfare. But markets are embedded in institutions and when institutions are poor markets are often absent or have perverse outcomes. And in most developing countries institutions are poor. Similarly, democracy is an incredibly good thing. And it’s certainly the least worst means of governance that humans have developed. But in countries where the nation state sits awkwardly against identity and informal institutions, democracy struggles. It’s not a panacea.

Which isn’t to say that economic markets or democratic polities are bad things, even in the most troubled developing countries, but rather that they aren’t the sole answer to the curly problems of aid and development. They’re only part of the answer: compliments to good aid and hard work in determining what works in governance; not alternatives.

Finally (and by now I’m all out of segues) Johann Hari attributes the commodity price crisis, not to rising demand in China, not to supply shocks, not even to ethanol, but rather to investment banks working the futures market. Is he correct? I don’t know. If he is, he’s certainly right about one thing: morally, if not legally, that’s an incredible crime.

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