Getting Development Right

In Foreign Affairs, Nancy Birdsall, Dani Rodrik, and Arvind Subramanian on economic devlopment:

The contrasting experiences of eastern Asia, China, and India suggest that the secret of poverty-reducing growth lies in creating business opportunities for domestic investors, including the poor, through institutional innovations that are tailored to local political and institutional realities. Ignoring these realities carries the risk that pro-poor policies, even when they are part of apparently sound and well-intentioned IMF and World Bank programs, will be captured by local elites.

Wealthy nations and international development organizations thus should not operate as if the right policies and institutional arrangements are the same across time and space. Yet current WTO rules on subsidies, foreign investment, and patents preclude some of the policy choices made, for example, by South Korea and Taiwan in the past, when rules under the WTO’s predecessor, the General Agreement on Tariffs and Trade, were more permissive. What is more, new WTO members typically confront demands to conform their trade and industrial policies to standards that go well beyond existing WTO agreements. The new Basle II international banking standards, better fitted to banks in industrialized nations, risk making it more difficult for banks in developing countries to compete.

To be sure, not all internationally imposed economic discipline is harmful. The principle of transparency, enshrined in international trade agreements and many global financial codes, is fully consistent with policy independence, as long as governments are provided leeway with respect to actual policy content. A well-functioning international economic system does need rules. But international rules should regulate the interface between different policies and institutional regimes, not erase them.