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The global context and its
implications for emerging
economies
Dani Rodrik
June 3, 2010

The setting
Financial stability is being restored in the advanced
countries eventually
Recovery is taking place, but economic growth in the
advanced economies is likely to fall short from pre-crisis
levels
– sizable wealth destruction + burden of public debt => slow
consumption growth
– European crisis will exert continuing drag at best
Political constituency for “economic openness” will
remain weak at best in the advanced countries
– Significant strains on world trade regime is likely
So the pace of economic globalization is likely to slow
down
– Domestic markets and domestic growth strategies will become
more important for the health of tradable industries

Incomplete economic recovery
Real GDP, advanced economies (2000=100)
120
115
110
105
100
95
90
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Global trade unlikely to recover its
previous buoyancy
Global trade volume (2000=100)
170
160
150
140
130
120
110
100
90
80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Protectionist clouds on the horizon
China’s surpluses and global macro imbalances
– Even some distinguished free traders now favor
punitive tariffs on China
Excess capacity in many sectors
– Steel: 19% global overcapacity in 2008 (MGI)
Renewed emphasis of the role of government in
the economy
– Market fundamentalism is dead
WTO and the multilateral trade regime in trouble
for some time
– Problems of over-reach reach and legitimacy

The good, the bad, and the ugly
1. Managed globalization
– Better balance between the prerogative of nation
states and international rules
2. Business as usual
– Continued reliance on (necessarily inadequate)
improvements in global governance and
coordination
3. Return to the 1930s
– Protectionist free-for
for-all
The first option is the only practical and
sustainable remedy for the world economy

A slower pace of globalization is
not necessarily bad news
Growth comes from convergence with the productivity
level (the “technology”) that prevails in the rich countries
– The stock of ideas and knowledge that constitutes
“technology” does not disappear or dissipate when rich
countries grow more slowly or when world trade is less buoyant.
Countries of the Latin American region grew more
rapidly prior to the 1980s than they have since
For countries with large domestic/regional markets
domestic market growth can sustain rapid increase in
output in tradables

Comparative economic performance
of Latin America by periods
8
7
6
Annual average growth rate of GDP per capita
5
4
3
2
1
East Asia
Advanced economies
Latin America
0
1960-1980 1980-1990 1990-2008
-1
-2

Comparative economic performance
of Colombia
8
7
6
Annual average growth rate of GDP per capita
5
4
3
2
1
East Asia
Advanced economies
Latin America
Colombia
0
1960-1980 1980-1990 1990-2008
-1
-2

The long view on economic growth:
what’s globalization’s contribution?
Historical experience with growth
9
8
GDP per capita growth rate of fastest growing
country/region (annual average, %)
World GDP per capita growth rate (annual
average, %)
7
6
5
4
3
2
1
0
1000-1500 1500-1820 1820-1870 1870-1913 1913-1950 1950-73 1973-90 1990-2005
Western Europe United States Other Western
offshoots
Mexico Norway Japan South Korea China

What drives growth in developing
Three models of growth:
countries?
1. Foreign borrowing-led growth
• countries in the periphery of EU in 1990s, LA in 1970s, …
2. Commodity booms
• 19th century, many African countries in the last decade
3. Structural transformation-led growth
• From low-productivity traditional products to modern, mostly
manufacturing activities (and lately increasingly into tradable
services)
• Based not on (static) comparative advantage, but on producing
what richer countries produce
Only the last has been a sustained source of convergence
(Japan, S. Korea, China)

Countries that rely less on external
resources grow faster in the longer term
Source: Prasad, Rajan, and Subramanian (2006).

Can Latin America return to rapid
growth? Pluses
Growth potential, as measured by “convergence
gap” with advanced countries, larger than ever
since the early 1970s
Significant capacity to absorb (and generate)
new technologies
Much greater integration in international trade
and production networks
Better macroeconomic management
Improved governance and institutions

Can Latin America return to rapid
growth? Minuses
Endemic tendency for high real interest rates
– A consequence of history of fiscal imprudence and
macroeconomic instability
Much greater integration in global finance
– Sudden stops and financial whiplash
– Currency overvaluation as soon as optimism sets in
Much greater conflict between “productivist” and
finance-centered centered policies
– Should monetary policy target purely inflation or take into
account competitiveness and employment too?
– Should capital inflows be allowed to lead to currency
appreciation or result in sterilization and capital controls?
– Is there a role for industrial policies?

What has worked in East Asia:
“productivist” policies
Sound “fundamentals”
– Market-friendly policies
– Macro stability
But also:
– Industrial policies in support of new economic
activities
– Undervalued currencies to promote tradables
– (The more a country relies on industrial policies, the
less the need for currency undervaluation, and vice
versa)
– A certain degree of repression of finance, to enable:
Development banking
Subsidized credit
Undervaluation

… combined with an enabling
external environment
Permissive with regard to industrial policies
– At least under GATT and
– Until recently
Willing to absorb excess supply of tradables
– U.S. attitude of benign neglect towards current
account deficits
Bretton Woods I and II
– Unconcerned with undervaluation in developing
countries
Again, until recently

Latin America cannot duplicate Asia
History of macroeconomic instability
Financial globalization
Global trade rules

But it can internalize the main
lessons
Economic transformation requires strategic
collaboration between the private sector and the
government
– Instead of a hands-off approach
– Important role for “industrial policies”
Currency volatility and overvaluation is very
harmful to economic development
– Role of capital controls
Only high levels of domestic saving can reduce
the economy’s reliance on capital inflows without
hurting investment and growth
– Role of strong fiscal policy