More evidence that neoliberalism worked
Earlier I argued that the entire world economy hit a wall around 1975. Between 1950 and 1975 even dysfunctional models saw rapid growth. Even statist and autarchic models (The Soviet Union, Brazil, Mexico, etc) could round up peasants and put them into factories making steel and washing machines. But then the model ran out of gas when more sophisticated products and services were needed.
This Dani Rodrik post shows that Latin America grew fast from 1950 to 1975, and then hit a wall. Growth slowed sharply, as it did in most other places as well. Latin America did very poorly from 1975-90. After 1990 it has done somewhat better as a result of modest neoliberal reforms. The exception is Chile, which did a lot of neoliberal reforms, and has done a lot better than the rest of Latin America.
The same happened everywhere. The more neoliberal economies did better after 1975 than the more statist or autarchic economies; Thailand vs. Burma, UK vs. Italy, Sweden after 1994, vs Sweden before 1994, etc, etc.
Interesting, Rodrik reaches almost exactly the opposite conclusion.
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23. June 2010 at 10:30
The raw growth rates are almost secondary to this point:
“The worse overall performance under WC is accounted entirely by the fact that there was much less desirable structural change — labor moving from low to high-productivity activities — under WC than under IS.”
Overall, I think you are challenging Rodrik’s separation of the early IS period from the debt crisis period – arguing the former caused the latter. No idea there, since much of the debt crisis was caused by expansion of social programs rather than import substituting industrialization policies. Regardless of whether IS caused the debt crisis, his data point about the lack of labor movement to high productivity activities under the washington consensus is still true.
23. June 2010 at 11:03
Statsguy; You said;
“Regardless of whether IS caused the debt crisis, his data point about the lack of labor movement to high productivity activities under the washington consensus is still true.”
Sure it’s true, but my cross-sectional argument seems much more persuasive than his time series argument with one observation.
23. June 2010 at 11:11
I couldn’t believe when I read that Rodrik wrote “Ignore the intermediate period of debt crisis (1975-90)…” It’s like the idea that Latin America debt crisis could have been a result of the policies of preceding era is totally out of the reach for him. His post is a pure propaganda.
23. June 2010 at 11:23
Note that it was in the 70’s it was Nixon that dismantled the restrictions on capital flows that had been in place to regulate finance. This was the Bretton Woods system. Some believe that this has had a profound and destructive effect on the world economy.
23. June 2010 at 11:56
Professor Sumner,
Do you plan on publishing a book a book based on the ideas you’ve presented concerning neoliberalism vs Rodrik, Denmark, Scandinavia, liberalterianism, New Hampshire, etc. etc. etc.
Heck, you could just print out all of the posts on this subject of the last two years and stick them into a book.
For example, Jeffrey Miron’s latest book on libertarianism is effectively a compendium of his class lecture notes from his course on libertarianism (and he’s got his syllabus online, which is pretty awesome).
🙂
Joe
23. June 2010 at 12:17
@Igor, Rodrik deals with that point in his earlier post:
23. June 2010 at 12:42
Igor, I wondered about that too. I presume that if growth slowed sharply for reasons having nothing to do with debt crises, then that could make a debt crisis more likely. So disentangling cause and effect is difficult.
Jon, Yes, but I don’t think that affected Latin America, where exchange rates floated.
Joe, Thanks. I need to get the Depression book published first, before I think about anything else.
David, Thanks, but I’m not sure I follow. Is he making a AD-based argument for the slowdown? That doesn’t make much sense in high inflation Latin America (although it was a factor in the Chilean depression of 1982.) The slowdown had to be due to supply-side factors. If IS was beginning to be a drag on AS, then that could easily cause debt crises in Latin America if money had been borrowed on the expectation that fast growth would continue.
But again, you really need to analyze cross-sectional evidence if you are going to seriously evaluate this issue. Did the IS or the neoliberal economies do better since 1975? That’s the question.
23. June 2010 at 12:46
Scott, you’re a monetary economist going up against a development economist here, on the topic of development. And not just any development economist. Be cautious 😉
Besides which, I think Rodrik would interpret “neoliberalism” very differently from your own use of the word. I do not think Rodrik would describe (say) the PRC as neoliberal or Washington Consensus.
Also, there’s the fact that the quality of institutions is at least somewhat endogenous; rich countries can afford good institutions. And policy isn’t something that can be applied by snapping your fingers: a country with poor institutions is likely to horrible at protectionism; not everyone is South Korea. But such a country is also likely to be horrible at enforcing private property, even if its current leaders wished to do so. Local institutions and constraints matter.
23. June 2010 at 13:05
The unsatisfying answer would probably be that the economies that did better applied reforms carefully adapted to their existing situation, and the economies that did worse applied reforms that were not. The IS-versus-neoliberal argument is essentially orthogonal.
This quote from an old Rodrik post captures the stance I am trying to describe, I think:
23. June 2010 at 16:12
David,
The Rodrik argument can be convincing, but, as far as I can tell about the brazilian case, there was a huge drop in TFP in the aftermath of the debt crisis. This can be hardly explained by budget deficits and lack of capital inflows alone.
24. June 2010 at 04:58
David; You said;
“Scott, you’re a monetary economist going up against a development economist here, on the topic of development. And not just any development economist. Be cautious 😉
Besides which, I think Rodrik would interpret “neoliberalism” very differently from your own use of the word. I do not think Rodrik would describe (say) the PRC as neoliberal or Washington Consensus.”
Not just any development economist? Is there something I should know about him? I wouldn’t describe the PRC as being particularly neoliberal (expect perhaps relative to Maoist China), so I doubt Rodrik and I would disagree on that issue. BTW, The Heritage Foundation index ranks China as being very statist.
You said;
“Also, there’s the fact that the quality of institutions is at least somewhat endogenous; rich countries can afford good institutions. And policy isn’t something that can be applied by snapping your fingers: a country with poor institutions is likely to horrible at protectionism; not everyone is South Korea. But such a country is also likely to be horrible at enforcing private property, even if its current leaders wished to do so. Local institutions and constraints matter.”
True, but I don’t see how this relates to my differences with Rodrik. We aren’t discussing whether it is easy to make changes, but whether the changes that have actually occurred tended to help or hurt.
I would add that countries are rich partly because of their institutions, so causality may go both ways.
David#2, I don’t see trade liberalization as being the old debate. The developing world still needs more trade liberalization. However, I do agree that other issues are now relatively more important.
I don’t like the phrase ‘Washington Consensus’ because Washington had little to do with the neoliberal revolution that swept the world after 1980. Countries that wanted to follow our advice did so, and those that didn’t want to did not do so. Sometimes aid was tied to reforms, but these restrictions were easily evaded. Just look at Africa.
Rafael, I agree.
BTW, Rodrik may have many good and convincing arguments for his view, but I am merely a blogger responding to his particular post. I don’t think any serious economist would agree that a sweeping argument built on a single observation is persuasive. Maybe my neoliberal posts are equally unpersuasive, but at least they are built on multiple observations. I thought it was interesting that Rodrik’s data completely supported my earlier posts on neoliberalism, and yet he reached the exact opposite conclusions. That is all.
24. June 2010 at 09:56
Ugh, I knew the conversation would turn this way – the key point of IS, recall, was moving manufacturing into higher value added sectors/industries.
BTW, the LatAm debt crisis is still open for debate, and certainly some amount of it was fiscal policies, and primarily expansion of social programs and the state sector. But some part was also _US_ monetary policy – something that domestic macro people often overlook. Notably, the creation of high expectations of future inflation for the dollar, which allowed countries to borrow in dollars thinking those dollars could be repaid cheaply. When the Fed killed inflation in 1982, the net present cost of paying back dollar-denominated debt skyrocketed, essentially making many governments insolvent.
Borrowing in foreign currencies is always risky, but moreso at the national level. At the local level, a local company can always default/delcare bankruptcy without causing an international incident. Unfortunately, another aspect of fiscal crisis is that firms often use political leverage to get states to absorb/back their debt – particularly when firms are quasi-national. Perhaps these dynamics should be considered more in explaining the Chile case as well.
24. June 2010 at 10:22
An interesting view…
25. June 2010 at 11:28
Statsguy, Yes, but IS did not succeed. Latin American growth fell far behind growth in the export-oriented East Asian countries. Latin America got stuck in low value added industries.
Tight money in the US hurt in 1982, but the East Asian countries faced the same problem. The mistake in Latin America was partly too much debt, partly IS, and partly too much exchange rate rigidity. Chile switched to inflation targeting after the 1982 crisis.