Of chickens, eggs and mayonnaise – amateur cook’s thoughts on economic development

March 28, 2007

Whilst I am stuck in a post I want to write on Europe to celebrate it’s 50th birthday (hope I’ll make it soon), while having lots of work to get done, please have a look in the meantime at what others write. At the moment Trade Diversion seems to be the blog that is the most up-to-speed on the globalization, trade and aid debate (seem to be having lots of time these days, Jonathan, lucky you! Thanks for all this!).

What struck me in scrolling the last titles Trade Diversion showed on my Google Reader, is the ever-emerging chicken-and-egg question: What makes development – the state or markets?

William Easterly on Africa in the Wall Street Journal: Africa needs markets, not aid. Overall, I say: good point! Bono and his “Red” American Express card will not save the world. And look at 50 years of aid: full swiss bank accounts and a continent as marginalised as ever. But then, can’t do without decent governments. Markets can’t work without the rule of law, or some form of working administration. I recommend in these respects a few bits of literature, sometimes more telling (yes, that’s what literature is for) than any academic piece with complex OLS regressions. E.g. V.S. Naipaul, A Bend in the River (1979). The story of an East African shop-owner of Indian ancestry who sets up business in an unnamed country, but probably the Congo (Zaire), just after independence. A rich novel. In includes among others an incredible description of predatory government when the shop is being “nationalised”. Or: Ahmadou Kourouma’s, Les Soleils des Indépendances (The Suns of Independence), written in 1976 in grand style. It’s the tragi-comic story of a West African descendent of a prestigious ruling family forced to live as a mendicant and with the curse of sterility after his country’s independence. The country has a big resemblence to the Ivory Coast, where Kourouma came from. Three reasons: first colonial politics set him aside as local ruler (his cousin got the post), second he lost his business during the fight for independence, third: he was not given a share in the spoils of independence because he was illiterate, i.e., some post in the administration to live off corruption. The most coveted posts were the management of a “coopérative” (agricultural and other production co-operative). He laments many things, but among others, the death of business, which he said at least was guaranteed under colonialism (!). (For sure that’s not the heart of the story, and French colonialism was a nightmare, and included forced labour until the 1930s, but this story tells a lot about the so-called “business and investment climate” that emerged after independence, and why the Ivory Coast’s model ultimately collapsed… )

Dani Rodrik in the FT today, advocating new-age mercantilism in the WTO in the name of “policy space”:

What is striking about China, India and a few other Asian countries that have done well recently is that they have played the globalisation game by the Bretton Woods rulebook. These countries did not significantly liberalise their import regimes until well after their economies had taken off; they continue to restrict short-term capital inflows. They have used industrial policies – many banned by the WTO – to restructure their economies and enable them to better take advantage of world markets.

Rich and poor nations need breathing space for different reasons. Rich countries need it so they can revive the social compacts that underpinned the success of Bretton Woods. They need flexibility to interfere in trade when trade conflicts with deeply held values at home – as, for example, with child labour or health and safety concerns – or severely weakens the bargaining power of workers. Poor nations need room to engage in exchange rate and industrial policies that will diversify and restructure their economies, without which their ability to benefit from globalisation is circumscribed.

It is time, then, to consider a new bar- gain. When rich and poor nations come together to negotiate the rules of the game they should stop thinking in terms of exchanging market access: “I will open my markets in x if you open yours in y.” They should consider ins-tead exchanging policy space: “I will al- low you to protect your national social compact if you allow me to engage in development strategies that conflict with WTO and International Monetary Fund rules of good behaviour.” The challenge is to design procedures that enable the use of policy space for so-cially desirable purposes while limiting it for beggar-thy-neighbour purposes.

Somehow I like Rodrik less and less. Mercantilism is rubbish, and applying it to regulation is even more absurd! But he has a point: development does not happen in a vacuum, and countries that grow rich do not do it like in economic textbooks. Most of all, they do not necessarily follow IMF prescriptions or comply with trade liberalising orthodoxy. We know! But what he is advocating is purely and simply stagnation. I am a bit tired of the debate on China or India – pro market liberals say they are booming because they are liberalising, and market-sceptics say that they grow for the precise reason that they don’t apply orthodox mainstream economic textbook methods! In my very quick busy housewife’s tone I would like to say: “stop this useless chicken-and-egg question”. You need both. But most of all, since we mentioned Africa before: China, Vietnam, Korea, Japan, all those Asian tigers have a century-long tradition of a state (as does, to a lesser extent, and in a much more messy way, India), Africa doesn’t. But it’s not only an African problem. Having studied Central American countries for my LSE dissertation, these struck me as being one of the counter-examples of Dani Rodrik’s famous arugument in the 1990s that the more open a country is to trade the bigger its government. The ratios of exports and imports to GDP of, say, Honduras, are about 100%. But Honduras, like El Salvador, or Nicaragua, or Guatemala for centuries never had had something that can be decently called a state or government. These countries have been mainly the playground of rich families, and never had any particular attention from Spain in the centuries preceding independence (Mexico is another story). And even today’s somewhat more modern “states” are embroyonic and their functioning skewed in favour of a few powerful people (yeah, I sound like Che Guevara, but even the IMF keeps telling Guatemala to raise its domestic tax ratio to GDP and to target the country’s wealthy for this: the problem is these wealthy people vote and sit in government): there’s just nothing! this means: appalling security conditions, bad roads, no infrastructure whatsoever, and GDP per capita levels one doesn’t reallt want to think about…Even if these countries had more “policy space”, I doubt anything significant would happen. So: it is strong/more-or-less-functioning/even:socialist (!) states that liberalise that make it. You need the two conditions! One doesn’t go without the other.

So, it’s not a chicken-and-egg story. As we are talking eggs, I’d say it’s a “mayonnaise” story – markets are the oil, states are the egg yolk – but it needs a lot of skill to make the mayonnaise thicken. And of course, no mayonnaise with yolk alone, or oil alone (And having neither oil nor yolk seems to be the case of many African countries). Have we cracked the code yet on how this magic works?

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