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Tuesday, September 13, 2005

The Washington Consensus: "Ideology, not Analysis"

Brad DeLong discusses a fascinating debate between a Harvard economist and a Yale economist about the sources of India's remarkable growth. A common view is that India's growth acceleration is due to the neoliberal reforms that began in 1991: free trade, lowering tariffs, deregulating business, rolling back the "license raj," and so on.

A typical purveyor of this view is Thomas Friedman, according to Harvard's Dani Rodrik and the IMF's Arvind Subramanian. They quote a Friedman interview with a prominent Indian industrialist, who described "the cumbersome bureaucratic rules and pervasive state ownership that suffocated the Indian private sector," until the 1991 reforms, when "Our Berlin Wall fell."
It was like unleashing a caged tiger. Trade controls were abolished. We were always at 3 percent growth, the so-called Hindu rate of growth--—slow, cautious, and conservative. To make [better returns], you had to go to America. Well, three years later [after the 1991 reforms] we were at 7 percent rate of growth.
As Rodrik and Subramanian point out in a compelling paper, the problem with this story is that India's growth in the 1980s wasn't at all slow. In fact, it was just as rapid as it's been since 1991. India's growth miracle began around 1980, long before the neoliberal "Washington consensus" reforms.

The Yale economist, critiquing the Harvard study, doesn't deny that the growth takeoff began long before the 1991 reforms, but argues that India's growth in the 1980s wasn't sustainable because it was driven by an expansion of the public sector. I think the Harvard side rebutted the "growth due to unsustainable deficits" theory in the original paper*, and I won't try to summarize the whole debate.

But I was particularly struck by just how weak some of the "unsustainable growth" arguments really are, despite having apparently gained widespread acceptance, from Friedman's spot on the Times' op-ed page to the hallowed halls of Yale.

The Yale guy says that India's expansion was "fueled by" the expansion of government, including "real wage expansion in the public sector." If you read his footnote, you learn that public sector wages grew a factor of 3.45, while prices grew by a factor of 2.37 during the 1980s. Do some division and take a 10th root, and you find that real government wages grew by 3.8% per year. Is that fast or slow? Well, in the economy as a whole, labor productivity growth was also just about 3.8% per year in the 1980s! (Rodrik and Subramanian Table 1).

So India's bureaucrats were just keeping up with their private sector counterparts! Wage increases just sufficient to keep pace with economy-wide productivity gains are hardly evidence of expanding government. So this Yale argument seems truly lame.**

With academic understatement, Rodrik and Subramanian nicely sum up the problem with their critics:
We suspect that there is a tendency to dismiss the growth of the 1980s because it makes the subsequent reforms less impressive ("since the system was not reformed, any growth that came out should have been unsustainable--—i.e., bad growth"). But that would be just ideology, not analysis.


* Rodrik and Subramanian point out that the only way that "Keynesianism run amok" could cause the India's huge surge in productivity during the 1980s is by putting unused resources to work: raising capacity utilization in factors and lowering unemployment. But that didn't happen, they argue, at least not on a large enough scale to explain much of the productivity acceleration.

** This is just econ 101 stuff. The "law of one price" predicts that wages will tend to rise at the rate of economy-wide productivity. If private sector productivity and wages are rising, public sector wages have to rise too, even if government productivity isn't increasing. If public sector wages don't rise, bureaucrats will quit their government jobs and get higher-wage jobs in the private sector, as middle management in a factory, say. So basic economics predicts that public sector wages will tend to keep up with private sector wages, assuming the government doesn't want to see all its best workers leave.

Wednesday, September 07, 2005

New Orleans Evacuees: "Sort of Scary"

How to explain the behavior of the authorities?

Why did FEMA turn away the Red Cross and many others who offered to help? Why were the Superdome and Convention Center locked down, and the evacuees forbidden to leave? "Worse than a prison," said one Superdome occupant. "We've virtually made them prisoners," said the Sheriff of neighboring Jefferson Parish, who had ordered his forces to surround a group of evacuees in an open field.

Why were people packed onto busses and planes without being told whether destination was Baton Rouge, Houston, or Utah?

Why were friends and relatives forbidden to enter the city and transport their loved ones to safety? Why were bridges out of town blockaded by armed police? I've seen relatively little about these hard-hearted practices in the mainstream press: the last two links are to horrifying first-hand accounts.

Presumably the authorities placed their first priority on preventing looting in the French Quarter or the wealthy neighborhoods of Jefferson Parish, both a short walk away from the Convention Center and Superdome. One National Guard General described his units' role as conducting "combat operations" against an "insurgency."

Preventing looting is a worthy goal, to be sure. But not a goal that justifies treating tens of thousands of people like animals. And not a goal worth people's lives.

How could the authorities decide to treat everyone in New Orleans as a potential looter, rioter, insurgent? The simplest explanation seems to be that they view poor black people with tremendous contempt and fear. An attitude nicely summed up by Barbara Bush's comment on the evacuees in Houston, "what I'’m hearing, which is sort of scary, is they all want to stay in Texas."

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