Sunday, July 5, 2020

Protected enclaves are not going to change the world

In the last book published by Esther Duflo and Abhijit Banerjee, recent Economics Nobel laureates, entitled "Good Economics for Hard Times," they implicitly respond to some critics of their previous work. These critics had argued that it would be difficult to change the world "one experiment at a time," suggesting that their micro approach based on Randomized Control Trials could only address small scale problems, in which external validity was at least problematic. In their new book, they cannot be blamed for not thinking big, because they address most of the current big problems of humanity, such as inequalities, trade policies, migrations, climate change or automatization. To do that, for each of these topics, they survey the academic literature (not only experiments) and provide their own view. Although the arguments for every topic have lots of subtleties, the main message is that market mechanisms are not reliable to solve most of these problems, mainly because they work much less smoothly than assumed by traditional economic theory. Then societies should rely on government solutions that focus on those policies that are known to provide good solutions, and not on those about which we know little. One example they give is that we should be less obsessed about economic growth. Obsession with growth was at the root of "supply" policies that have caused a lot on inequality since the 1980s in countries such as the USA and the UK. As a result of these policies, such as lower taxation, these countries have not found the growth panacea, but they are today more unequal than in the past, and more unequal than countries that have been more reluctant to embrace the same policies.
As another example of policies targeting growth about which they are skeptical, they mention the ZEDEs policy promoted by economist Paul Romer (another Nobel laureate). ZEDEs are zones for employment and economic development, which Romer not only promoted in his academic work, but also as a consultant. These zones would be reserved for "charter cities," giant "protected enclaves" that live by what Duflo and Banerjee call Romerian rules within nations that do not. Although Honduras has so far been the only country to buy the idea, Romer wants hundreds of these charter cities around the world, each of them hosting eventually one million people. This is based on the idea that big virtuous cities generate positive externalities, and these create innovation, social capital and growth. The authors explain that, though it claimed inspiration from Romer's ideas, the Honduran vision seemed closer to the banana enclaves of the past: "They deviated form the get-go when they decided not to use the oversight of a third-party government," which was a key ingredient of Romer's project. Duflo and Banerjee conclude that this story "suggests charter cities are unlikely to hold the key to sustained growth in developing countries for the very good reason that the internal political compulsions the charter is intended to hold at bay often have a way of biting back." The idea that somehow one can escape a problematic world by building gated communities, insulated agencies or small virtuous independent countries illustrates the misleading dream that one can fix the world by injecting into it perfect laboratories.

1 comment:

  1. Mmmm.... I'd be rather more convinced by Duflo & Bannerjee and similar if the proponents of an active government industrial policy could say how they will identify and turn off support for unsuccesful projects. As an economist in the UK government machine in the 1970s, the real problem was almost always how to turn off subsidy support. Programmes and projects alike were still supported way after it was clear that they were not going to achieve their objectives, primarily because of political support.

    If we can resolve that conundrum, maybe the D&B (and Rodrik) policies are worth considering. But, the mid-late 20th Century record on this issue is poor in many OECD countries.

    Jon Stern