Is World Bank Starting to Understand Growth? Dani Rodrik

At first sight, the World Bank’s newest report on globalisation contains few surprises. It repeats the mantra that the countries that went farther down the path of globalisation became the ones with the greatest success in economic growth and poverty reduction. However, buried within the pages of the report is a startling admission: Countries that integrated into the world economy most rapidly were not necessarily those that adopted the most pro-trade policies. Think about this. For the first time, the World Bank acknowledges that trade liberalisation may not be an effective instrument, not only for stimulating growth, but even for integration in world markets.

It is admitting that its repeated assertions about the benefits of globalisation do not carry direct implications for how trade policy should be conducted in developing countries. Rapid integration into global markets is a consequence, not of trade liberalisation or adherence to World Trade Organisation strictures per se, but of successful growth strategies with often highly idiosyncratic characteristics. Consider China and India, the two growth miracles of the last 20 years, as well as the leading exemplars of what the World Bank calls ‘globalisers’. In both, the main trade reforms took place about a decade after the onset of higher growth. Moreover, trade restrictions in China and India remain among the highest in the world.

In China’s case, high growth started in the late 1970s, with the introduction of the household responsibility system in agriculture and of two-tier pricing. China’s authorities did not embark on import liberalisation in earnest until much later, during the second half of the 1980s and the 1990s.

As for India, its trend growth rate increased substantially in the early 1980s, by about 3 per cent. Meanwhile, serious trade reform did not start until 1991-93.Because both India and China increased trade substantially, they are considered globalisers by the World Bank’s criterion. But as their experience reveals, deep trade liberalisation is hardly ever a factor in fostering higher growth and expanded trade early on.

Unfortunately, there is still a lot of subterfuge in the World Bank’s report. You won’t notice how much ground it has given up unless you dig deep in the report and look at the way the evidence is presented.

For example, a chart shows that the World Bank’s sample of ‘more globalised’ countries had deeper tariff cuts than the ‘less globalised’ ones. The unstated implication is that tariff cuts were an important determinant of global integration and hence growth.

If there was direct evidence that these tariff cuts were correlated with growth, you can be certain that the World Bank would have presented those results.

In fact, the report denies the question is even relevant. ‘Whether There is a casual connection from opening up trade to faster growth is not the issue’ it declares. So why did the World Bank invest so much intellectual capital on establishing the linkage between trade openness and growth?

These oddities are perhaps to be expected for an institution being forced to backtrack from a position that has become analytically and empirically untenable.

The bottom line is this. Countries that managed to grow rapidly and reduce poverty also tended to become increasingly integrated into the world economy. What’s at issue is the policy conclusion to be drawn from this empirical observation. Previously, the World Bank wanted you to think that a significant liberalisation of the trade regime is a key element in unleashing all those good things. Now it is no longer so sure. Neither should we be.

(The writer is professor of political economy at the John F. Kennedy School of Government at Harvard University.)

[Source: The Straits Times, February 12, 2002]