A loyal MR reader, Daniel Kahn, directs my attention to Dani Rodrik's latest; here is the bottom line:
Note how different this finding is from the conditional convergence results that dominate the work on economic growth. The message of the conditional convergence literature is as follows: “what you need to do to converge to the income levels of rich countries is to get your policies and institutions in order.” [Jason] Hwang’s (forthcoming) results say: “what you need to do to converge is to get a foothold in the goods that rich countries produce.” The absence of unconditional convergence at the aggregate level must be due, in turn, to structural features of low-income economies. Poor countries remain poor because they are not producing the kind of goods that will carry them towards riches.
Here are Jason Hwang's papers; he is currently on the job market and will be a big deal in the profession. This abstract summarizes what will be an important paper...
How does the introduction of new goods affect growth? While recent
evidence has highlighted the role of new goods in raising the diversity
and sophistication of a country’s production structure, which in turn
matter for growth, little evidence tells us why. I propose a simple
channel of impact relying on two building blocks. One, there is a
convergence force operating at the product level. The further behind
the frontier you are in a given product, the faster you raise quality.
Two, new goods are introduced with a greater distance to the frontier
than in existing goods. I construct a Schumpeterian growth model with
these features to show how entry into new goods influences aggregate
outcomes by determining the range of products in which convergence
occurs. Detailed trade statistics provide strong support for both
building blocks of the model. Using unit values as a proxy for quality,
I find that unit values exhibit strong convergence – at about 5% a year
– for the great majority of products in the sample. Also the gap in
unit values relative to the world frontier is larger for new goods.
Confirming a key prediction of the model, I further show that, holding
constant levels of development, unit values are inversely related to
measures of diversification and sophistication of a country’s exports.
This last finding helps to explain a recently documented puzzle
regarding the high sophistication and low unit values of Chinese
exports. (To be posted in early November)
Perhaps I will not be convinced (what goods can be produced reflects an unobserved heterogeneity in underlying conditions), but Hwang is worth watching.
The paper that I’m too lazy to do, but somewhat similar in spirit to Tyler’s unobserved heterogeneity story: Maybe a big “industrial policy” push by a developing country to develop the same type of goods as the developed countries also generates the political will to establish institutions (courts, the rule of law, etc.) like those of developed countries. Absent this big industrial policy push, there just wouldn’t be strong enough political incentives to build these market-supporting institutions. Taiwan might be an example.
So, we might start by looking for products with production methods that especially require solid legal institutions and respect for property rights. We’d compare the countries that made a big push to make those products (before and after within country) to countries that made a big push in other products.
One negative example: Resource extraction sure as heck doesn’t require good institutions, and may even present issues that make respect for property rights politically unpalatable.
Re: Keith
Maybe a big “industrial policy” push by a developing country to develop the same type of goods as the developed countries also generates the political will to establish institutions (courts, the rule of law, etc.) like those of developed countries. Absent this big industrial policy push, there just wouldn’t be strong enough political incentives to build these market-supporting institutions. Taiwan might be an example.
I think South Korea works as an example too — I don’t know what Taiwan was like, from the perspective of “institutions,” and so on, when Taiwan’s economy really started in on its expansion, but in Korea, the whole industrial development push that produced the conglomerates, like LG and Samsung, that have brought glory to Korea, starts up in the 60s, when Korean institutions shift from quasi-democracy into outright military dictatorship under Park Chung Hee.
Some people have also argued that the Japanese experience between the Meiji Restoration and WWII is parallel to this — indeed, Park Chung Hee and his government appear to have modelled the chaebol on the earlier Japanese zaibatsu (modern keiretsu). On the other hand, there are also people who argue that while this is the Japanese self-image, today, it may not actually reflect in the historical record, so perhaps they are not quite the same.
I concur that you need good policies first. Then either government or private funds can be invested to produce new products.
Without good policies, government investment will go to waste and graft, and private investment will stay away.
One of the reasons producing competetive products at the high level might be worthwhile whether or not you have solid institutions is that you acquire extremely valuable business know-how that you can’t get by arranging institutions well, or setting up a legal system, or democracy or what-have-you. Your managers learn about managing supply chains, about assembly lines, about setting up networks of subcontractors, about all kinds of things I know nothing at all about, but which are essential to running a business. They develop knowledge about sounding out markets, about sensing consumer demand, about working with partners, etc. And if you acquire or develop this kind of know-how, and disseminate it across the population, I think you can leverage it up into broader economic development. My understanding is that this is why China has insisted that foreign companies form JV’s with local Chinese companies — to ensure that this kind of know-how flows into China. So also with Korean students studying in America and working a while, perhaps even a whole career, and then returning home to Korea to pass what they’ve learned about business operations on. If you have a society with a broad base of experience in those areas, you’ll probably be able to attract outside investment, even in the absence of the kind of institutions we think are essential to economic development.
That initial government investment will, of course, go to waste in many or most cases — it did in Korea, did in Japan, and probably in Taiwan too, and produce inefficient manufacturing and whatnot. And indeed, Korea is still a pretty corrupt country. But the question is not whether every last government dollar is being spent perfectly, but whether in the end, throwing that money around gets the society effectively where it wants to go. If perfect institutions only get you half-way there, and corrupt chaebol get you all the way there, I suspect many developing countries would opt for the crony capitalism over ideal institutions — those institutions can come later.
On the other hand, other than perhaps Taiwan (where I understand there were significant tensions between the Han ruling classes that came in with Chiang Kai-Shek and the native Taiwanese), the successes here have also built on long traditions of unified civil governance and almost total ethnic uniformity. I think that probably helps more than formal institutions could, but is useless advice for most countries, because most poor countries seem to be multi-ethnic and extremely diverse.
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