Dani Rodrik on Premature Deindustrialization and Why the World is Second Best, at Best (Ep. 4 - Live at Mason)

On premature deindustrialization, the world’s trilemmas, the political economy of John le Carré, RCTs, Orhan Pamuk, and more.

Tyler and Harvard economist Dani Rodrik discuss premature deindustrialization, the world’s trilemmas, the political economy of John le Carré, what’s so special about manufacturing, Orhan Pamuk, RCTs, and why the world is second best at best.

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TYLER COWEN: Not long ago, a journalist called me up and asked me, “Whose papers do you look forward to reading more than any others?” My answer, without really hesitating, was Dani Rodrik.

He’s our guest today. He’s arguably the world’s leading and most important economist on trade, globalization, industrial policy, and lately the prerequisites for liberal democracy. His new book, which I’ll mention again, Economics Rules — that’s spelled R-U-L-E-S. Why should I not read my own blurb?

Quote, “The best economists make the best methodologists, and Dani Rodrik is both. His Economics Rules is the single best source for explaining the strengths and weaknesses of economics to an outside audience.”

On premature deindustrialization

We’re going to start this conversation with some questions about some of your recent papers on this topic of premature deindustrialization. I find this one of the most interesting themes in your work. The notion that a mix of automation and competitive trade with wealthier nations might mean that poorer nations today will not be able to industrialize and follow the path of South Korea or Taiwan or Singapore.

Now, if this is the case, if a lot of economies out there are deindustrializing prematurely, before they’ve built up a significant middle class, what do you see happening, for instance, for the future of Africa? The parts of Africa which do relatively well, but let’s say they do not industrialize. What does that future look like in your vision?

DANI RODRIK: I don’t think it means that there is a very bleak future for the countries of sub-Saharan Africa. I just think that is going to be very difficult, if not impossible, for them to replicate the very rapid convergence experience of East and Southeast Asian countries.

Credit: Nick Donner Photography

If you look throughout economic history, the countries that have made that very rapid leap into middle income and beyond that advanced country status, starting from the non-Western countries first, Japan from the late 19th century onward, and then after the Second World War, South Korea, Taiwan, and then eventually, of course, China, along with a number of countries that did more or less the same in the periphery of Western Europe, closer to Western Europe.

The one thing that’s common in all of them is very rapid industrialization. With very rapid industrialization, you can get growth rates on a per capita basis of 4 or 5 percent per year on an ongoing basis for decade after decade. That’s sort of what’s made South Korea what it is today, in that kind of rapid growth.

But that’s, if you will, a very exceptional kind of experience. I think if the possibilities of rapid industrialization are no longer there — as you suggest, I think they are no longer there — what we’re going to get is slower growth.

What I call growth is based much more on the steady and hard work of accumulating basic capabilities, human capital, skills, institutional improvement. All of those things that are required for the long run, but don’t produce the kind of 4 percent, 5 percent growth on a per annum basis, as we’ve seen in those rapid growth countries.

COWEN: But say, let’s think of it from a political economy point of view. South Korea has done very well exporting, and that created for them a set of interest groups which were willing to fund that infrastructure, bring the whole country together so to speak.

You end up with a middle class being built rapidly. That middle class is the foundation for a democracy. The special interest groups behind the infrastructure, it’s clear who they are. They win almost every political battle, even without a democracy. You see some version of the same in China.

You end up with a middle class being built rapidly. That middle class is the foundation for a democracy. The special interest groups behind the infrastructure, it’s clear who they are. They win almost every political battle, even without a democracy. You see some version of the same in China.

The countries that don’t industrialize, could you imagine them having an ongoing kind of ramshackle existence where consumer goods flood in at cheap prices? They grow at 4 percent instead of 10 percent.

But Lagos, in a way, always looks a bit like current Lagos and never looks like Seoul, South Korea. What’s even a developed country, maybe, in some fundamental psychological sense, changes?

RODRIK: I think what matters here is probably less the quantitative side, how rapidly you’re growing, but the qualitative things that are happening during the growth process. You have to bear in mind that there are archetypal, successful industrialization growth, liberal democracy kind of countries in fact, never experienced the kind of growth rate that Japan and South Korea or China did. In the aftermath of the Industrial Revolution, Great Britain was growing at rates that we would scoff at today for any emerging market.

So, it wasn’t the growth itself that enabled the development of the middle class and the emergence and the spread of liberal values and the creating of the liberal democracy, but the transformation of the economy and its social structure in a particular kind of way: if you will, the spread of bourgeois liberal values, the restraints placed on the state in terms of how much it could do and under what kind of circumstances.

[I]t wasn’t the growth itself that enabled the development of the middle class and the emergence and the spread of liberal values and the creating of the liberal democracy, but the transformation of the economy and its social structure in a particular kind of way: if you will, the spread of bourgeois liberal values, the restraints placed on the state in terms of how much it could do and under what kind of circumstances.

You’re right that in countries like Nigeria and many others, which have had very rapid population growth, where the urban areas have swollen with people from the countryside. I think managing these kinds of tensions, especially when you’re in a sort of open economy and the markets are being flooded by cheap consumer goods from elsewhere, managing these transitions are very difficult, especially since these countries, and Africa, of course, particularly so, are torn apart by a number of additional cleavages of ethnic, language, regional, tribal, and so forth. Those are all things that are making it very, very difficult for these countries.

I’m not so sure that rapid growth would necessarily have eliminated these kinds of problems. In some ways, it might even aggravate them.

Think, for example, that in the Arab Spring, the kind of troubles and the riots that started the Arab Spring, arose not in those parts of the Arab world which had had the least amount of development but, in fact, in those countries like Tunisia and Egypt which had had the most rapid development.

It wasn’t just GDP growth, per se. Tunisia was always an exemplar of improvements in human and social development.

COWEN: Civil society.

RODRIK: Civil society, improvements in health, improvements in education. Of course, it was an authoritarian regime, but you had the UN development program, the World Bank touting the Tunisian example of in the Middle East as an Arab country that had done very well.

I think it’s less the rate of growth and then what is happening underneath that in terms of the overall structure. There you have many, many different paths that are possible.

One of my favorite economists is Albert Hirschman. For a while, two years, I occupied the chair that was named after him at the Institute for Advanced Study.

He coined the term of possibilism, which was the notion that as much as in social science you think you want to generate theories that are deterministic theories of . . . you have industrialization and then the urbanization and then the bourgeoisie. That’s going to generate capitalist democracy and so forth.

A lot of what happens is just maneuvering around the constraints that geography and history have bequeathed and doing things that otherwise might not have seemed possible. If 50 percent is driven by exogenous conditions, 50 percent is still basically in your hands is one way of looking at it.

I always look for things in how you can manipulate and maneuver the context in which you find yourself in. I think those possibilities always exist.

COWEN: Let me try to pin down a fundamental aspect of your thought that I see running through a lot of different papers. That’s the idea that there’s something special about manufacturing.

As I understand you, if you do industrial policy and you get the right kind of manufacturing that puts you on a better path. Your papers on productivity convergence — once you’re started in manufacturing, according to your data, you get bigger ongoing gains than you do an agriculture. Catch-up in agriculture is especially slow.

I find this intuitively plausible but if we try to ask at the most foundational level, what is it exactly that’s the difference between agriculture and manufacturing which accounts for this? What are the microfoundations of where that comes from?

RODRIK: I think a couple of things. One is that manufacturing technology is much more easily transportable across international borders. It’s much easier to adopt and adapt manufacturing technology. You can take a textile and clothing plant. You still have to tinker with it, but it’s much easier to transplant, unlike many agricultural technologies.

We’ve seen that, for example, in the case of the Green Revolution. It required a lot of on-the-ground adaptation because the weather and soil conditions can be very different.

If you will, the non-traded component of that technology transfer is much greater in agriculture. For that matter, it’s also in services. You can figure out how to run a hospital system or education system in an advanced country. You’re never going to be able to just take that and transplant in a developing country because, technically speaking, the non-traded component of that technology, or the latent part of the technology that requires that adaptation to local contexts.

COWEN: So it’s about the people and the culture?

RODRIK: I wouldn’t say it’s the culture. In the case of agriculture, it’s the soil and the weather. I don’t want to say that some people are lazy and, therefore, they’re culturally not predisposed to this. I’m just saying . . .

COWEN: That we see it in services suggest the weather and soil may be part of it but they can’t be driving it.

RODRIK: No, no. In services, I’m saying a lot of services have been very difficult to transplant. For example, mobile telephony has been very easy. It stands out as one area. But most services are basically figuring out how to do education and health. . .

COWEN: Or a good health care system.

RODRIK: Exactly.

COWEN: That seems to make it culture.

RODRIK: If you want to talk about culture, let’s open up a big parenthesis and get into that. I don’t know exactly where institutions and organizations and incentives move into a domain where we start calling it culture.

Culture is back in economics. I still have to be convinced that it’s actually adding a significant amount to what we learn.

Culture is back in economics. I still have to be convinced that it’s actually adding a significant amount to what we learn.

Let me get back to the question about manufacturing. One thing I said is that it’s much easier to move technology. If you’ve seen the way that Toyota manufactures cars in Japan or in the United States or in South Africa, it’s more or less the same. That is possible.

The second thing, which I think is the microeconomics of why it is that manufacturing is so special is that manufacturing, standard, traditional manufacturing like making cars or garments or toys or wigs, has the feature that you can absorb a lot of very unskilled workers into that. Being a production worker, even in an auto factory, certainly in a footwear factory, doesn’t take a whole lot of skill.

That means that you can absorb a lot of people off the countryside in a much more rapid way than you could in a lot of other activities where technology and skill are actually highly complementary.

I heard once a Chinese entrepreneur telling me that she was running a footwear factory and she was hiring people from the countryside when the industry was starting. Basically, the only skill that was required to get that thing going was not whether they could read, not whether they were numerate, but basically whether they could do this with their hands.

Basic eye-hand coordination is all the skill that was required. You could put thousands of people into these factories. The fact that you can absorb a lot of people, you can increase their productivity threefold, fourfold off the farm by putting them in these factories is an opportunity that very few other economic sectors provide.

A third, and I’ll just mention it. A third thing, which is very important in manufacturing, is tradable. You don’t have to develop a whole industrial complex. You can import inputs and then export the outputs.

You don’t require domestic demand to take off. You don’t require an economy-wide productivity revolution in order to have consumers to whom you can sell your output. You can simply sell it on world markets.

What that means is that it’s enough to develop mastery in one segment of manufacturing at a time. That provides the kind of engine that you need.

Compare that with the kind of transformation you need in services where most of the output has to be sold domestically. You need basically everybody’s incomes to grow, every sector to experience a productivity increase so you have a large enough market that you can sell. Otherwise, any service sector that is doing really well eventually is going to experience very rapid terms of trade deterioration domestically.

Those things, the transferability of the technology, the fact that it can absorb a lot of unskilled workers — traditionally, this is what’s changing — off the countryside, or out of informality and tradability I think is what makes manufacturing, historically has made it special.

COWEN: A question about industrial policy. I think we would agree in a number of the East Asian Tigers, industrial policy has worked out pretty well. But take the case now, there’s premature deindustrialization going on in many countries. It might be hard to reverse.

Richard Baldwin writes of the splitting up of supply chains. So South Korea and Japan had relatively integrated supply chains. Now, the supply chains are all around the globe.

In a time like this, where manufacturing is changing rapidly and policy itself is subject to a status quo bias, as we know from your own writings, what do you think is the new role for industrial policy, if any? Should we today, perhaps, not be more skeptical about it than we were, say, when Singapore started it?

RODRIK: I think the answer to your last question is yes, although I wouldn’t say we should be more skeptical. I think we should expect lower return to it, is what I like to say, simply because I think the possibilities of industrialization in the sense that you could put, in the old days, 30, 35 percent of your labor force into manufacturing — that is not going to happen. Sub-Saharan Africa will not get there. What that means is that the returns to even successful industrial policy these days are less.

That has a couple of implications. One is that, increasingly, I think we really need a different term. We shouldn’t say industrial policy. Maybe we should talk about a structural transformation policy. Your perspective in terms of how do you get to rapid transformation. You should move away a little bit at the margin from manufacturing into other parts of the economy.

I think you should be thinking more about services, as well. A lot of services are tradable. To some extent, some of the advantages might exist in tradable services, as well.

The other thing which I think a lot of . . . a common mistake in industrial policy that low- and middle-income countries do, which is to look at industrial policy or criteria for success of industrial policy in terms of output, exports, innovation, R&D, patents, and things like that. Whereas I would put a lot more emphasis on actually employment.

Credit: Nick Donner Photography

The question is, are you generating adequate employment in these more productive industries that are oriented into world markets? Because the kind of industrial policy that ends up generating profits and investment and R&D in a low-to-middle-income country, but at the same time your employment is shrinking, is not going to be the kind of high-return activity for the economy as a whole.

I think you’re basically right. I go around these days a lot less advocating for very forceful industrial policy, in large part because I do think that the returns to it have fallen. I think also we need to think through a lot more what it should look like in a world where in fact we are concerned at least as much about services as manufacturing, even in the middle-income or low-income countries.

On “trilemmas” around the world

COWEN: Let me introduce one of your best-known ideas. It’s sometimes called Rodrik’s trilemma of the world economy. Here’s how one of my readers defined it. “According to this theory, democracy, national sovereignty, and global economic integration are mutually incompatible. We can combine any two of the three, but never have all three simultaneously and in full.”

Given that, which I would agree with, if we take the eurozone today, something clearly isn’t working. I don’t mean just Greece. But every now and then we have of a nascent recovery, and the recovery’s over before it really has even gotten underway. The eurozone is now sliding back to deflation. France, Italy seem to be slow-growth countries permanently.

Let’s say it’s up to you. Given Rodrik’s trilemma, what should the eurozone do?

RODRIK: Academically, it’s very easy to give an answer. It’s what the trilemma suggests. That Europe or Europe’s policymakers should decide whether they want . . .

COWEN: But they ask you. We’re about to decide, Professor Rodrik. Please tell us which one to give up.

RODRIK: Tyler, as you know, we’re very good about, our job is to lay out the tradeoffs, but not to decide where we want to be on those.

COWEN: But you as a citizen. Say you’re a European . . .

RODRIK: I’ll tell you that too. Let me answer the first question. The first question is I as somebody who cannot put my . . . if I cannot put myself in the shoes of the European electorate, European citizenry, I say the choice is very clear-cut — either more political integration or less economic integration.

That’s the choice that . . . assuming that we don’t want to give up on democracy. If we want to subject to the constraint that we want Europe to remain, or regain its thriving democracy, then this is the inescapable choice that the trilemma points to. Which is to say, you have to decide whether you’re going to politically integrate, and if you’re not going to politically integrate, you have to figure out a way of economically beginning at least some of this integration. That means losing the monetary integration in particular.

Now, you ask me which would be my preference. My preference certainly would have been before this crisis or well into the crisis, a year or two into the crisis, would have been this is the opportunity where you just basically go to your electorates and say, “This is why we need to federalize Europe. This is why we need to politically integrate. This is why we need not just banking integration, but we also need a significant amount of fiscal integration, and the creation of pan-European political space . . .”

COWEN: That’s your first choice is full steam ahead with integration.

RODRIK: I would be full steam ahead with political integration to back up the significant amount of economic integration that already exists.

COWEN: But now, you’ve seen three or four more years. We know one of Rodrik’s principles is economics is almost always about the 2nd, 3rd, or 17th best. What do you choose today?

RODRIK: I’m afraid that, and I say this very, very reluctantly, that I do think that for a number of countries at least, that a loosening of the restraints of monetary integration, of a common currency.

COWEN: So you’d create a graceful path out of the euro for some nations.

RODRIK: Well, of course, that’s the difficulty, because it’s very difficult to figure out what that grace, if in fact that graceful path exists. But yes. Laying that aside, those transitional costs aside, I think at this point I just do not see the kind of . . .

European integration was always an elite project. European integration was never something that the people demanded, and then the leaders said, “OK, we will do whatever you ask.” But it was always an elite project the governmental leaders sold to their population, to their electorate.

European integration was always an elite project. European integration was never something that the people demanded, and then the leaders said, “OK, we will do whatever you ask.” It was always an elite project the governmental leaders sold to their population, to their electorate.

I think what happened with the euro crisis is that somebody like America, instead of going out and saying, “Look, this is not a crisis of . . . it’s not a moral issue, that here you have a profligate country that we need to discipline. But this is really a crisis of interdependence. That it was as much a German problem or German banks that are the source of the problem as the Greeks who borrowed, or the Spaniards who borrowed.”

That line was never put forth to the German population. It was always become the moralistic narrative of the North versus South. I think that’s where the political elite failed in Europe. I think with that, it’s very difficult to see now how you’re going to undo that in Europe, unfortunately.

Credit: Nick Donner Photography

COWEN: Let’s say you’re China. You’re on the ruling council. They haven’t even discarded democracy yet. Maybe they’re sitting in Rodrik’s bilemma or dilemma, whatever it would be called, and they’re trying to maintain capital controls.

But there’s more phony invoicing all the time, exports running through Hong Kong. A lot of chicanery, people trading money out through bitcoin. A lot of leakage. In the last few months, they’ve spent three or four hundred billion of reserves, that’s real money, trying to keep the value of their currency up. It still doesn’t seem to be working.

In the past, you’ve argued eloquently capital controls often make a good deal of sense. Their capital controls now, should they double down and defend the value of the yuan at all costs? Or should they let it go, open up the capital account, and see what the new value of the currency will be?

RODRIK: I don’t think this is . . .

COWEN: You’re in charge, again.

RODRIK: I would not do anything hasty on the capital controls front at all. I don’t think that the Chinese have mismanaged this as badly as often it is described in the financial press.

COWEN: I agree with that.

RODRIK: I think that there was a run up in the stock market and then they were, they did a bunch of things to try to prop the bubble, and eventually they did, and maybe it went a little bit too far.

But they did more or less the right things in this whole process. They’ve allowed the currency in the last few years to move more freely. They’re true to their policy roots, which have paid off very handsomely over the last three decades.

I think the last thing that we outsiders should do is second-guess the wisdom of Chinese economic policymaking. We’re talking about the country that has engineered history’s most miraculous poverty reduction program ever.

COWEN: Let’s say another $300 billion of reserves go out the door to keep the peg. Your phone rings in Cambridge, Mass. . . .

RODRIK: You’re starting from $300 billion. It’s nothing. It’s just a drop in the bucket. Why did they accumulate those reserves to begin with? Obviously, yeah, it’s not like they’re running out of reserves. That is not the issue. If they weren’t losing some reserves, that’s part of the optimal adjustment.

If you ask me, “Tell me why I should be worried about China?” I can give you real reasons why you should be worrying about China relating to the fact that they in fact have both a huge political transformation ahead of them, as well as a huge economic transformation. The political transformation being the one of having to open up eventually, become more democratic, and we have no idea how they will manage that.

The economic transformation, which they have not really gotten underway seriously — they’ve started, but it’s really, they are at the very beginning — it’s hard to turn into more of a domestically consumer-oriented, less investing, more consuming kind of economy, and less dependent on the world market. Those are hugely challenging problems.

Managing the currency right now, and the financials. There’s the stock market, which is a tiny, tiny part of the Chinese economy. It pales, I think, in comparison to those bigger issues.

COWEN: Let’s take Milton Friedman’s dilemma, which is in a way an early version of Rodrik’s trilemma. Friedman argued there was a natural tension between high levels of immigration and the welfare state. You see this quite sharply now in Western Europe. In some ways, you see it in the United States, even though our immigration has not been up lately. But the tension is there.

If politically it turned out that you had to choose at the margin, cutting back immigration or cutting back the welfare state, you as a citizen, the economist cannot say. But what are your thoughts on that?

RODRIK: I start from the supposition that borders matter. Borders have moral significance. I accept the notion that let’s say we as a democracy or our citizens don’t necessarily put the same weight on somebody on the other side of the border as they do somebody who’s their neighbor or share the same political system.

COWEN: But you can, if you choose to.

RODRIK: But I can if I choose to. The question I ask myself is this. Let’s suppose that the tradeoffs are, let’s suppose is as you’ve put it. Which is that we can allow some people to come in, and those who are coming in are going to be better off, potentially at the cost of some of my own conationals being worse off.

My answer is that, at the margin, this is a relatively easy question to answer. Because I say, “OK, how much weight would I have to place on somebody on the other side of the border, relative to somebody on my side of the border, for me not to let that person in?” If you do the calculation, which I have done recently, which is to say . . .

Let me be clear about what I’m saying. I’m asking the question, under what kind of weighting of outsiders would it be a bad idea for me not to let some more people to come in? The answer is that I would have to put a weight of less than one-fifth of somebody on the other side of the border compared to somebody here.

Then I say, look, I might understand that it’s reasonable to say, “OK, maybe I care twice as much as somebody who’s my neighbor as somebody who’s not,” but five times as much? I’m not so sure. That seems excessive.

Given how restrictive and how high these barriers are at the moment, at the margin, to me it’s a relatively easy answer. Which is to say, yes, at this point, it makes sense for rich countries to take in more people from the poor countries.

Given how restrictive and how high these barriers are at the moment, at the margin, to me it’s a relatively easy answer. Which is to say, yes, at this point, it makes sense for rich countries to take in more people from the poor countries.

To put it in a somewhat, to draw an analogy between the trade regime, what has happened in terms of trade liberalization and the migration regime, the migration regime today is more or less where the trade regime was back in the 1950s. Back in the 1950s, the global gains from further liberalizing of trade relative to the income distributional costs within countries and so forth was relatively huge.*

I think the migration regime is somehow back there. We need to rationalize it and liberalize it a little bit more. I’m evading the tougher question, of course, which is where would you stop? It’s easy for me to answer at this point — the regulations are too restrictive.

But where would you actually stop? I would certainly stop at a point where the integrity of public institutions and the welfare systems of the advanced countries would be seriously threatened. But I don’t know where that is.

COWEN: I would say today Germans are a relatively cosmopolitan people on the world stage. How well will the absorption of 800,000-plus Syrians go in Germany? What is your opinion?

RODRIK: I think they have absorbed more Turks over the 1960s and 1970s, and look at the German national team.

COWEN: If you grade that on a scale of A to F, how well has it gone, in your view? Turkish absorption into Germany?

RODRIK: I think it’s gone actually remarkably well. There’re certainly some lessons that could be drawn from that. I don’t know anybody who would say that this has been a terrible mistake for Germany. I think they certainly have enriched, leaving aside their economic contribution, they’ve enriched German life.

I think that’s the most direct comparison and analogue is what happened with the Turkish inflow of the ‘60s and ‘70s. That was huge. I don’t remember offhand what the numbers are, but certainly it was huge, and it’s worked quite well.

On Turkey

COWEN: You were born in Turkey, you grew up in Turkey. I have so many questions about Turkey to ask you, but let me just try two or three. Let’s take the Turkish city of Konya. I’ve been to Konya. Outsiders sometimes call Konya the Bible Belt of Turkey. I’m not sure that’s a good comparison, but it’s a more religious city than Istanbul. It’s a kind of heartland city in Turkey.

Just a little simple question. I would put it this way. Do you trust the median voter in Konya? If you think about Turkey’s troubles, if Turkey were truly ruled by the median voter in Konya, to what extent would things be fine, or to what extent is the problem it’s not really democratic enough? Do you see what I’m asking? Because in some obvious ways, the current regime is not very democratic, even though there are elections of a sort. But do you trust the median voter in Konya?

RODRIK: I do trust the median voter in Konya, as I would trust the median voter in any country. However, I think when you think about democracy, it’s not just about the median voter. I think, and this is why I’m working on this topic, on the question of liberal democracy.

The things about democracy that we really care about are just two-fold. One is that we want the median voter’s views to be reflected. The second is we don’t want to allow the median voter to do whatever he or she wants to the rest of the population.

The things about democracy that we really care about are just two-fold. One is that we want the median voter’s views to be reflected. The second is we don’t want to allow the median voter to do whatever he or she wants to the rest of the population.

That’s why I think the constraints that liberalism or liberal institutions, the rule of law, the constraints of non-discrimination of minorities of ideological or ethnic or religious sort. Those are equally important parts of well-functioning democracies.

One thing that has happened in countries like Turkey, which is actually a very widespread phenomenon around the world, is as the franchise and elections have spread around the world, by the count of the Polity, which is this group that keeps track of this, we have now more democracies than autocracies in the world.

But they’re all electoral democracies. They’re democracies precisely in the sense that you meant, which is that you have elections regularly they’re generally free and fair.

But what they do, however, is that they allow the winners of those elections to more or less freely trample on the rights of those who are not part of that winning majority. So the liberal element of that democracy is really what’s missing. I’m all for empowering the median voter in Turkey or elsewhere, but all in the context of rules and practices that ensure equal treatment of minorities of all kind.

That’s really the part that I think, for example, the whole political economy literature on democracy has missed out on, because essentially it’s just thinking about it in terms of elections and the median voter, not thinking about it in terms of these restraints on what the median voter can do.

COWEN: Thinking in terms of minorities, if we go to the Eastern Mediterranean in times past, today’s İzmir was once Smyrna. It was a fantastically cosmopolitan city. Greeks, Armenians, people from all over the Middle East, Westerners lived there. It was for quite a while in harmony. The earlier Ottoman Empire was quite a cosmopolitan place in many parts. Again, by its time, a fair degree of harmony.

In the early part of the 20th century, that changes very fundamentally. You have some very violent events, and it’s never gone back. Do you think it’s possible for the Eastern Mediterranean to be an area where these civil minorities have protection, or do you think the more monoglot version, Turks plus Kurds, now plus refugees, is simply what we’re going to have?

How do you think about that whole change? A great, terrible, unfortunate development, or somehow, it’s a bit like the European 17th century. Great human tragedy, but a clearing out that enabled nation-states to in some way move forward?

RODRIK: The big change, of course, was nationalism and the creation of the nation-state. I don’t think that the old order was a particularly desirable one. It is one that of course significantly circumscribed what the Greeks or the Armenians or the Jews or the other minorities were allowed to do in these multinational empires. It’s not like this wonderful Ancien Régime that we can’t resuscitate.

Of course, the forces of nationalism and the creation of the nation-state moved us into this new world where I think what happened in the Eastern Mediterranean as in so many other parts of the world was that you had mobilization of the masses under a nationalist rubric relatively early in terms of historical development compared to Western European countries.

Credit: Nick Donner Photography

For example, in Western Europe you had liberal ideas developed before the franchise became a mass franchise. In fact in Britain and Western Europe, the liberals didn’t want — liberalism existed before democracy came into being.

Whereas, of course, in the Eastern Mediterranean and places like Turkey we’re trying to create liberalism, after you had a nationalist mobilization and the creation of democratic-like regimes based on the mass franchise. It’s harder to bring those ideas of tolerance, the separation of powers, the rule of law and so forth relatively later in the game. That’s what’s happening.

But it is not impossible. One of the places that I like to talk about, in fact I talk about this in my latest paper on liberal democracy, is the case of Lebanon in the Eastern Mediterranean. Lebanon until 1975 was a fascinating example of — it wasn’t exactly a liberal democracy because it was based on these different groups. They each had their shares in power and constitutionally they were each allocated . . .

COWEN: It was feisty, though.

RODRIK: But it was, political scientists writing about Lebanon in the ’60s and ’70s talked about it as a liberal democracy. The reason was because you had so many different groups, so many cross-cutting cleavages. You had the Muslims and Christians, the Christians were between the Greek Orthodox and the Muslims were between the Shia and the Sunni.

There were so many of these cross-cutting cleavages that they essentially had reached a modus operandi that no individual group had this notion that if simply they could prevail, then they could rule forever. When you don’t have that expectation, then you work out bargains with alternatives. Because you are afraid of what the other side is going to do to you when they come to power, if they have a chance of doing that.

Of course, how that system came to an end is also interesting, because once you had the massive influx of Palestinian refugees from Jordan, that balance was upset. You now have one group that can, has potentially, can see itself as having a majority for an indefinite period time, so no longer has to essentially keep on with that basic compromise. That’s how the Lebanese consociational system came to an end after 1975 with the civil war.

But at least that gives you an idea of the possibilities that this, I don’t think is cultural. I don’t think this has anything to do necessarily with Islam. It’s not in the water. These things can happen.

But you need this experience of learning to compromise and to think that you need to be moderate in your policies because it might be that some other group will rule after you. So that you have this, if you will, these repeated game incentives to basically not discriminate against those not in power very much.

I can certainly come up with scenarios for Turkey where this might have developed over time. I would have to blame successive mistakes made by political leaderships at different times as to why this process has so often been short-circuited.

First, of course, the military by intervening repeatedly and, therefore, short-circuiting this process of building up these habits of regular change in power and therefore moderation and compromise developing. Of course, these days with the government of Erdoğan, who basically has just chosen the tactic that he’ll do anything to remain in power, including aggravate all the cleavages on the basis of sect, on the basis of nationality, and so forth.

COWEN: What then is the equilibrium with the Kurds? They’re scattered across several nations. It’s a burning issue in Turkey. Even with Kurdish circles there are multiple languages and different points of view.

Do you see that is headed toward something like Lebanon in its more vital, feistier time? Or do you see it going very badly wrong? The Kurds, Turkey, and to some extent Kurds and Iraq. Will there be a Kurdish state, and is there any equilibrium at all?

RODRIK: I think it’s very unlikely that there will be redrawing of the borders, formally. I see that as a very remote possibility. I think there was a possibility that the Turkish government would have reached a modus vivendi with the Kurds and some kind of resolution in the same way that the Basque problem in Spain was resolved.

COWEN: Is that resolved?

RODRIK: They’re not asking for independence. There’s not terrorism in the streets every day. I think in that way, I think, it’s been . . . in that sense it’s been resolved. Whereas the Kurdish problem right now in Turkey is terrible. Violence has flared up again and so forth. We’re back to some of the worst kind of conflict.

But I don’t think that there is something deeply structural that prevents the kind of compromise. I think the Kurdish nationalists are, in Turkey at least, are very clear-sighted in understanding that full independence is neither in their interests nor something that they are likely to get.

The kinds of things that they do want realistically are not things that the Turkish national government could not give up. There’s no fundamental problem as to why that cannot be resolved.

If it not being exploited for political reasons. Right now, for example, what’s happening is that Erdoğan is exploiting the Kurdish problem as a way of building up his own nationalist base. That’s being used, that particular cleavage is being used for a political purpose. But one can imagine other political strategies, other winning strategies that would involve compromise.

COWEN: Orhan Pamuk, by far the most famous Turkish author today. Overrated or underrated? What’s your take?

RODRIK: I have to say, I have never been able to finish one of his books.


RODRIK: This is not true. There’s one that I finished, but this actually wasn’t fiction. It was his memoirs of Istanbul. I did finish that because he grew up in a part of town which is very close to where I grew up too, so it was, I could associate.

But his novels, I have to say, are, I find convoluted and going around and around and around in circles. I’m not a big Orhan Pamuk fan. I love his older brother, by the way, who’s an economic historian, who’s a very distinguished economic historian, Şevket Pamuk, and I finished a lot of his books.


COWEN: So who’s your favorite novelist?

RODRIK: I love John le Carré. I think I’ve read probably every one of his novels. I like Ian McEwan a lot. I’m reading Jonathan Franzen’s book, Purity, right now, which I enjoy. He draws you in.

COWEN: If we take le Carré’s vision of how a spy agency works, is that Rodrik-esque political economy? Or does it force you to revise your views of politics?

RODRIK: No, no. It’s very human, right? It’s just the mundane and the small things that happen. It’s a very good way of actually putting it. I had not thought of this until you said it, Tyler. It’s a great point, that there’s a lot of lot of political economy in John le Carré’s description of how these bureaucracies operate and the personal relationships and so forth. I have to think about it.

I’ve never had this starry-eyed view of how government agencies operate. It’s not one that is jarring with respect to my own worldview.

I’ve never had this starry-eyed view of how government agencies operate. It’s not one that is jarring with respect to my own worldview.

COWEN: If I think of your work as a whole, I always like to ask this question about thinkers. What’s the underlying current which ties a lot of the different parts together? One thing that struck me going through your work. By the way, this pile is a small fraction of your work, and I feel sorry for my assistant who had to print it all out.

But even a lot of your papers that don’t mention Turkey at all, I guess personally, I read them as asking the question, “why hasn’t Turkey become a fully free and modern society?” Even if I think of your work on premature deindustrialization, if I think of Turkey in the 19th century, a big theme from my understanding is that Turkey is then prematurely industrializing, and that’s why the Ottoman Empire becomes the sick man of Europe.

I read a lot of your papers as looking at this elephant from different sides, even if not about Turkey at all. Would you respond to that? Do you think that’s a fair characterization?

RODRIK: I think that’s very perceptive. I think from my first foray into social science, I think that has been the question that I’ve been motivated by. Just to back up a little bit, when I was growing up in Turkey, in high school, of course social science was probably the last thing on my mind, just because of the way that social science is taught in Turkish schools — rote memorization and so forth. That wasn’t fun.

Like all Turkish kids of my generation with some academic pretensions or at least relatively good in school, my goal was to do engineering. So I came to Harvard as an undergraduate to study engineering, only to find out that there’s actually no engineering major at Harvard.

COWEN: Not yet.

RODRIK: Then I discovered the library and the books, and the fact that they had more books in Turkish, on Turkey and Turkish history in Widener Library than I could ever possibly find in Turkey. Then I started taking courses in political science and economics, and it just opened up to me what it meant to be thinking about these social, economic, and political questions.

But the one thing that motivated me always was this question of why was Turkey relatively poor and not developed, and the rest of the world, and the United States or Western Europe developed.

COWEN: Given this motivation, let me ask you for the simplest, crudest version of your answer. We all know boiling things down to a sentence is a horrible oversimplification, and you above virtually all other economists are about the complex and the multifaceted. But nonetheless, if you had to give us the super boiled down version of why hasn’t Turkey become a, more or less, fully free and modernized society, what would it be?

COWEN: And you’ll be allowed some follow-up. Give us the super short and then we’ll give you follow-up.

RODRIK: I’ll give you the general answer to that question, not for Turkey, but for countries like Turkey, and my general sort of question would be 50 percent structure, 50 percent agency, which is to say you start with a lot of initial conditions that aren’t very favorable. Going back to the 19th century, you start on the wrong end of the global division of labor. Everybody else is industrialized and you’re not, plus, then, the British come and they open up your trade regime and all the craft industries you have in the18th century are just decimated because of imports from Britain and other Western Europeans.

Then you get defeated in a world war. You start in very inauspicious circumstances.

Then agency. What happened, for example, under Mustafa Kemal Atatürk, who was the leader who made Turkey, who took Turkey from the ashes of the Ottoman Empire, erected the Turkish republic on top of that. He did a lot of very good things and a lot of very silly things, and we’re still living with the consequences of many of those things, including the good things.

The fact that Turkey is a relatively secular country with a large middle class to a large extent is the result of his top-down, extremely brutal, extremely narrow-minded view of what it meant to be a modern nation-state — basically take the Swiss civil code and the French criminal code and German commercial code and just apply it.

The fact that Turkey is a relatively secular country with a large middle class to a large extent is the result of [Atatürk’s] top-down, extremely brutal, extremely narrow-minded view of what it meant to be a modern nation-state — basically take the Swiss civil code and the French criminal code and German commercial code and just apply it.

But also a lot of the problems that we are having are also the residue of the fact that in that rigid view of how to modernize, he pushed out a lot of the people who need to be included back into the Turkish polity, including the conservatives, the religious conservatives, and a lot of others, and the Kurds.

COWEN: But if I look at Europe as a whole, there seems to be a line somewhere, maybe it’s at Slovenia or Croatia. You can debate where the line is. But east of that line, you don’t see full development. That at least suggests to me, it’s not mostly agency. There’s something structural. Because to think the leaders or the citizens in these different countries all made the same mistake, it doesn’t quite fit my other views about the world.

If you’re comparing Eastern and Western Europe, again, this isn’t only about Turkey. It’s not about Atatürk. You could say the same about most of Eastern Europe, except possibly Poland. What’s that fundamental difference between West and East that is giving rise structurally to whatever percent of the explanation you want to assign to structural forces?

RODRIK: You know, I would go back to people like Barrington Moore, who tried to explain why is it that Western Europe, Britain developed democratic institutions and it became very difficult elsewhere in Central Europe to do the same.

I think a lot of what he said had to do with the nature of, how did market forces and social structures interact? In particular, what was the mode of commercialization of agriculture?

If you started out with sort of peasant agriculture, small scale farms and landlords that weren’t interested in labor-repressive agriculture, who diversified into commercial businesses in urban areas, as in Britain, you got a very different kind of path of industrialization and political development.

Where you got large commercial estates, large landlords, absentee or not, interested in labor-repressive methods of farming, who did not diversify to a large extent into industry, into commercial enterprises, allied themselves with the state, so as to be able to continue their repression of the agrarian sector.

COWEN: So your three-word answer would be structure of agriculture, if we had to boil it down?

RODRIK: Yeah, I mean it has to be agriculture, because that’s where everything started. That’s where everybody was. That’s where the wealth was. If you go back . . .

COWEN: But not ideology? So, you’re an economic structuralist?

RODRIK: No. . . . Let me put it this way. If France was not in Western Europe but in Eastern Europe, I don’t think it would be the kind of democracy or the kind of industrial economy it came to be.

I think having the Netherlands in the North and Britain to the West, I think both the competition, the benchmarking, and the ideas, I think in that way geography made a difference. But geography, it sort of enables the transfer of ideas and who are you looking at as what kind of a country you want to be.

In many ways, France had the initial conditions that would have made it look more like a Central or Eastern European country than a Western European one. But the fact that it’s part of Western Europe I think has to do that it was it was so much closer to Britain.

I think you see the same about why is it that Vietnam has developed in the way that it has after it opened up its economy. I think if Vietnam was located in Latin America or Central America, I don’t think it would have been half the miracle that it was.

COWEN: Keep in mind, Vietnam is still poorer than Bolivia, which is the poorest country in South America. So, Vietnam has yet to show it’s a success.

RODRIK: Wouldn’t you bet in 10 years it won’t be?

COWEN: No, I wouldn’t bet. I’d say it’s an even money bet.

RODRIK: [laughs] OK.

On things under- and overrated

COWEN: Let’s go to a short question and answer part of the talk. I’m going to shout something out, ask you if it’s overrated or underrated. You give me a short answer. You’re free to pass if you want to.

As an economic method, going back to your book, this book Economic Rules, randomized control trials as an economic method. Overrated or underrated?

RODRIK: Today, overrated.

COWEN: Give us a quick why.

RODRIK: That’s the only thing that students do these days. I think that’s not the only way we’ll learn. So, it’s crowding out a lot. I think it was a fantastic contribution to the economics literature.

The way that I think about it is internal validity is not the only thing. The good thing about all these RCTs is they’re very good about being able to identify causal effects. But they’re very poor about being able to say anything about why is it that we get these effects or in fact whether the same effects would occur in other contexts elsewhere.

So, it worked here. We don’t know if it’s going to work somewhere else. It’s crowding out the kind of work that . . .

The good thing about all these RCTs is they’re very good about being able to identify causal effects. But they’re very poor about being able to say anything about why is it that we get these effects or in fact whether the same effects would occur in other contexts elsewhere.

COWEN: Political economy, because it’s hard to do an RCT on political economy.

RODRIK: But even in micro things. I think even in the kinds of things where we’ve applied RCTs, I think we should be thinking a lot harder conceptually and theoretically.

There was a time, when I came out of graduate school, if you were doing development economics and you were doing something empirical, you could never get a job. Probably in development economics at the time, you couldn’t get a job period. But the point was, doing empirical economics would not make you sort of rise up.

I think that was terrible, and I we’ve now basically moved all the way to the other extreme, where empirical work also means doing something where you put 100 percent weight on internal validity, but very little thought into issues of external validity or the basic theory.

I think we just have to correct some of that balance.

COWEN: Rumi, the 13th century Persian poet and his Sufi mysticism. As you know, he wrote some in Turkish. Overrated or underrated?

RODRIK: Not enough known.

COWEN: Nâzım Hikmet, Turkish poet, famous left wing figure, flirted with the Soviet Union.

RODRIK: Fantastic poet.

COWEN: So underrated?

RODRIK: Underrated.

COWEN: Underrated. The Iran nuclear deal. Overrated or underrated?


RODRIK: I think it’s just right.

COWEN: Just right. The idea of an independent Catalonia?

RODRIK: A lot of my friends will hate me for saying this, but overrated.


RODRIK: Again, my Catalonian friends are going to hate me for this, but when I ask what is it that they want to get out of independence, it seems that basically it’s just very much a sense of having been treated very badly by Madrid.

It’s almost like a very sort of 19th century sense of nationalism that is driving it. I sort of think that we should be beyond that. I think that in a thriving European Union, hopefully, if we get there, that basically a lot of regions can do a lot more things than they can do on their own.

I think the right evolution of political authority is up for grabs. Breaking up Spain I don’t think is going to really help that bigger goal of having a politically richer and deeply democratic Europe.

I don’t see what the upside really is except for this deep sense of 19th century ressentiment.

COWEN: What’s a country right now investors are underrating and a country they’re overrating in today’s world, given your understanding.

RODRIK: Brazil, I think, is deeply underrated right now. I think that when you look at what’s happening, on the one hand, in Brazil it shocks you that there is all this widespread corruption with Petrobras that seems to go all the way up.

On the other hand, when you look at how they’re dealing with this situation it’s incredibly impressive. It’s something that even in an advanced country you wouldn’t think would happen, that there you have these prosecutors and judges who are actually following the rule of the law.

COWEN: Real accountability.

RODRIK: Real accountability. This is not being used to settle political scores in the way that it would happen anywhere, if it was happening at all.

COWEN: They have industrial policies.

RODRIK: Their industrial policy isn’t great but they at least are trying to do something about it. That’s a somewhat separate issue.

To me, when I look at Brazil, they’re demonstrating a political maturity in the way that their system operates that is decades ahead of even the advanced industrial countries. I think the fact that they’re dealing with this and are going to have it behind them five years from now, eventually, it’s going to put them . . . I would put in the long play for Brazil.

When I look at Brazil, they’re demonstrating a political maturity in the way that their system operates that is decades ahead of even the advanced industrial countries.

COWEN: Overrated.

RODRIK: I think India, because I think the kind of growth that India has had, I don’t think it’s sustainable. Partly going back to our earlier discussion about premature deindustrialization. I think they have these plans to significantly strengthen their manufacturing base. I just don’t see it happening.

I think India can grow at 4, 5 percent per year on a sustainable basis. I don’t think it’s going to be 8 or 9 percent. When this sinks in, I think there’s going to be a negative overreaction, would be my fear.

On the need for gap years in graduate economics

COWEN: Last question before we turn to the audience. This, again, is getting back to your book. A reader wrote to me, “Rodrik was the Albert Hirschman professor at Princeton. Before that he received an Albert Hirschman Prize. Both Hirschman and Rodrik are economists who look at the same facts as everyone else but they see what nobody else has seen.

If you were allowed to make one change in the economics profession or academia — ” this is an institutional change or rules change, not an attitudinal change, but an actual change in how things are done, a change in a graduate program.

“If you could make one change to help produce more Dani Rodriks for all the rest of us, what would that be?”

RODRIK: I wish I had a very quick and good answer to this but it’s not a great answer but it probably would help. I was helped a lot by going into economics after having done political science. I think a lot of what’s wrong in economics is that it’s so much driven by people who first do engineering or math before they go into economics. And so, it’s relatively late that they get immersed into the real world.

I think anything that would get them a little bit more cognizant of the problems of the real world. I would say that there are parts of political science that have become even worse than economics right now. I’m not sure that that would work.

I don’t know. Maybe a gap year, spending a year in a developing country between your first and second year?

COWEN: That’s actually my idea, as well. I’m glad to hear you say that.

RODRIK: There we go. We just now have to find somebody to finance it.


COWEN: We now open up to the audience. There are two mics. Please get in line. I will alternate. Please note — these are questions for our guest, not lengthy statements. If you start making a lengthy statement I will cut you off.

Please head up to the mics with your questions and I will call on you and you will hear responses. At the mic over here. Please just announce your name, also.

AUDIENCE MEMBER: Hi. I’m a master’s student here. I’m actually considering spending the summer in a developing country. What one would you recommend?


RODRIK: One that you have not been to before or one in a continent that you haven’t been to before.

I always tell my students that they should always go to a country, when they have that chance to spend a summer or a year, to go somewhere which is as different from where they have some experience as possible.

That comparative . . . there are so many things you take for granted that you don’t even understand are things to be questioned. It’s only when you see another country that’s so different, then you start asking, “But how come that is working there? It’s not working here?”

For that, as many opportunities as you have to be asking that question, which is as different a place you can imagine from where you’ve been to.

AUDIENCE MEMBER: Given that I’ve only been in America and Mexico and I only have one summer, what would be the top of the list? I’m looking for specifics.

RODRIK: Go to India and travel. You will have seen so much diversity and variety.

COWEN: On this side.

AUDIENCE MEMBER: Thank you. I’m a teacher here. I have my class here, in fact, today. We are at the moment studying systems that produce structural conflicts. It makes me want to ask you, when you talk about premature deindustrialization, we’re in the middle of looking at Rosa Luxemburg’s work.

I wondered what your explanation is for whether there are structural causes for premature deindustrialization. If Luxemburg were here she would be talking about the effects of imperialism. I wonder how you would explain it.

RODRIK: Of course, in the 19th century, it was formal and informal empire. The so-called unequal trade treaties and so forth. You had India and China and the Ottoman Empire, all these nascent textile industries being decimated by imports from Britain.

But, of course, we also have cases like Japan, which in the late 19th century, despite having very low tariffs, being able to develop its own domestic industry. We have at least one exception, even back then, of a country that could industrialize despite those circumstances.

The late 20th and 21st century analogue of that imperialism, if you will, is China because it’s been China that has been essentially swamping the world with manufactured goods. You go to a country like Ethiopia today in Africa and basically everything is imported from China.

Fifty years ago, a country like Ethiopia would be manufacturing very simple things, from footwear to tables and chairs to cardboard boxes. But now, everything is coming from China.

The fact that we moved to a stage of the world where a country like China is able to exert such strong effect on world markets in manufacturing means that the opportunities for import substitution in manufacturing is significantly less today in the low income countries that have opened themselves up.

It’s not, obviously, imperialism but it’s sort of like, if you will, the imperialism of free trade might be one way of putting it for our current experience.

That’s clearly one. It’s also, in terms of the fact that earlier I was saying that traditionally manufacturing has had the ability to absorb a lot of unskilled labor. Manufacturing has become more and more capital-intensive over time. That means that now even garments or textiles, footwear, they’ve become fairly skill-intensive activities.

The Chinese entrepreneur I mentioned, when she goes to Ethiopia and opens up a footwear plant, she’s using a very different kind of labor. University graduates and many, many fewer of them compared to what the Chinese experience was.

I think changes in technology and globalization have been, I think, the two structural factors behind pushing for premature deindustrialization.


COWEN: On this side.

AUDIENCE MEMBER: When referring to the past political situation in Lebanon, you characterized it as preferable to the current, more autocratic, situation of today inasmuch as a large number of crosscutting cleavages and the mutual understanding among them to the effect that once in power it’s not necessarily guaranteed in the future, or something like the mutual fear of what the other will do, effectively necessitated deal-making and compromise.

Given this, what would be your position on nuclear proliferation? Aren’t you, by virtue of this, beholden to the position that the more countries with nukes, the more crosscutting there would be and the more effective, better functioning democracy?

COWEN: And when will Turkey have nuclear weapons? Want to discuss that?


RODRIK: You’re really pushing me to my areas of incompetency. I have no idea for that question. I have no inside knowledge of that to share.

I think the question you were asking is extending the notion that more crosscutting cleavages imply greater political stability and tolerance and moderation. Can we take that idea to the international sphere, in particular apply it to nuclear proliferation? If more states have nuclear weapons, would that make the world safer?

I’m not quite sure about the analogy, the way that you’ve taken that idea and extended it to the global sphere because the notion of crosscutting cleavages has to do with when you’re operating not in a state of anarchy, so to speak, but when you’re operating in a well-ordered polity.

I’m not sure that that analogy carries to what is effectively the state of anarchy at the global level, where there is no global government so the nature of competition is very different.

The idea of nuclear proliferation globally greatly worries me. Not because I think that the marginal country is going to be less responsible than the countries that already have nuclear weapons, but just because the more countries that have them, the greater the chance that at least one of them will be irresponsible rises.

I think just probabilistically that makes me very, very nervous. The analogy, I don’t think really quite applies.


COWEN: Next question.

AUDIENCE MEMBER: Thank you. I’m Brazilian. I have developing country experience that is more than enough, probably. Thank you for your words of hope on what’s going on down there.

Still, beside your words of hope, crony capitalism and draconian regulations are more the rule than the exception in Brazil. I would like to know if you believe that Brazil — is there a way of Brazil ever overcoming that in those five, six years that you said?

Or, putting it in another way, do those issues actually matter?

RODRIK: Maybe it’s easier to say — look, I come to Brazil as a Turk. I watch what’s happening in Brazil. I compare it to what is happening to Turkey.

It’s not like Turkey has had an easy time economically but the way that the financial markets have treated Turkey is incomparable to how badly Brazil has been treated.

I look at crony capitalism. I see at least that in Brazil, we have a system that’s actually dealing with it, and they’re dealing with it in a way that’s as clean as one could hope for.

What’s happening in Turkey? What’s happening in Turkey is that the extent of corruption and crony capitalism, the part of it that we have already seen, is vastly superior than anything that has come out in Brazil. We know that the president and his immediate family have been greatly implicated in vast amounts of corruption. We know that.

It’s the kind of thing that Dilma could be guilty of pales in comparison. The fact that anything in Turkey, in terms of trying to delete the judiciary when it went into trying to clean this system up, it did it in a way that was explicitly politically motivated. Therefore, it made it much easier for Erdoğan to clamp down on it because it was clear that it was a politically motivated attack on him, which makes neither side really right.

This essentially means that in a country like Turkey, basically you’re postponing all these problems into the future. They’re going to hamper your development, hamper your politics for decades to come.

At least in Brazil, you’re dealing with these things. You’re trying to overcome them. Maybe it won’t be five years. Maybe you’ll find other things that are happening.

My recommendation to you is at least take pride that you have a system that is actually trying to clean it up. That’s really rare. It’s not happening in Turkey. It’s not happening in Thailand. It’s not happening in most developing countries that I know of.

I think, in that way, Brazil is exemplary.

AUDIENCE MEMBER: Thank you very much.

RODRIK: Next question.

AUDIENCE MEMBER: I read a small excerpt about your new book, and I know that it’s about economic models. I was wondering how do you factor in best practice institutions when you consider economic models. Is there room to factor in, say, in your own words, second best institutions, and how effective would that be in the ultimate analysis of a country or a model?

RODRIK: I’ve said this before. I hate the notion of best practice. I think this is probably a very harmful notion. I was a student of Avinash Dixit, who was a great economist at Princeton. He likes to say, “The world is second best at best.”

I hate the notion of best practice. I think this is probably a very harmful notion. I was a student of Avinash Dixit, who was a great economist at Princeton. He likes to say, “The world is second best at best.”

You always have to think in those terms. The notion of a best practice is based on the idea that you can simply just have something that worked somewhere and take it and copy it and apply it somewhere else.

Not only does that not work in general, it gives us a very lazy frame of mind. We end up developing all these World Economic Forum scorecards where we have all these checklists of the business environment rankings, or even the sustainable development goals.

I think to some extent, these things can be important as public relations, as PR for it. But you look at all successful countries and what you’ll see is that you’ve had their societies and leaders who have always distilled experience from elsewhere from the lens of their own local knowledge.

I think that when you get that combination is really when things work. A best practice mindset, I think, is an enemy of that.

COWEN: Question here. Last question.

AUDIENCE MEMBER: Given that industrial policy largely failed in post-independence India to a great extent, do you advise the present Indian government to go ahead with the conventional industrial policy of picking winners and losers or should they, instead, liberalize factors and focus on expanding access to capital?

The second part, if they do go ahead with the strategy, do you think global demand right now is strong enough to sustain an export-based growth strategy or will it largely fail?

COWEN: You have three minutes to answer for a billion people.


RODRIK: First, I would never recommend a country to do anything unconventional.

I think it relates to some of the things that we were discussing. Yes, I think the returns to industrial policy are lower now. The returns to any export-oriented strategy are also lower now.

We haven’t talked about this but I think there’s a sense in which the world economy isn’t going to be as much of an engine for growth for developing and emerging markets in the future as it has been until now. As will manufacturing industry will not be that.

I don’t see this trade off between fundamentals versus a more proactive government policy that’s trying to generate new industries, not just manufacturing but also services. What I always look for is a very pragmatic kind of attitude towards the private sector and the business sector, which is a government that’s sort of saying, “What is it that we can do to unlock possibilities?” and keep an open mind on that.

It doesn’t mean you’re going to be picking winners but it does mean that you’re going to be willing to get activity started that might not have started otherwise. Some of them will fail. That’s in the nature of things.

I think having tried and failed is better often than not having tried at all. There’s no trade-off, really. You can do that and also work on your fundamentals, on your skills, and your capital base, and your infrastructure, certainly as India has to do.

Indian economic policy has very much moved in that direction. I think that’s fairly consistent with what the government is already doing except that I think they exaggerate how much growth and how much industrialization they can really get.

COWEN: Thank you so much for all of the stimulating words.


COWEN: There will be a book signing out front with Dani, Economics Rules, it is out this October. All of you here should buy and read it. Thank you again.

RODRIK: Thank you. Thank you, Tyler.

The Mercatus Center gratefully acknowledges the assistance of Stephen M. Jones in curating most of the hyperlinks found in this transcript.

Editor’s note

As often happens, Tyler Cowen’s conversation with Dani Rodrik inspired an interesting online discussion on free trade before the event even occurred. Donald Boudreaux, a senior fellow at the Mercatus Center and professor of economics at George Mason University, suggested in a comment on Cowen’s Marginal Revolution blog post about the event that Cowen should ask Rodrik about his views on the differences between free trade within a nation-state and free trade between nation-states. Rodrik posted a response that day on his own blog. Cowen highlighted the discussion at at Marginal Revolution, and Don Boudreaux responded at Cafe Hayek. Even economist Arnold Kling weighed in on the topic at his blog.