It is not openness to trade, but the ability to manage domestic social conflicts that has made the difference between those countries that continue to grow and those that have experienced economic collapse. Social conflicts and their management play a key role in transmitting the effects of external economic shocks on to economic performance. Therefore, societies that benefit the most from integration with the world economy are those that have the complementary institutions at home that manage and contain the conflicts that economic interdependence triggers. This, in an nutshell, was the message of a landmark lecture on "Globalization, Social Conflict and Economic Growth" delivered at UNCTAD today by Professor Dani Rodrik of Harvard University.
Professor Rodrik´s lecture was the eighth in a series established in the honor of Raúl Prebisch, UNCTAD´s founding Secretary-General (see TAD/INF/2721). It was attended by about 500 diplomats, international civil servants, academics, representatives of non-governmental organizations and journalists, as well as members of the public.
Prof. Rodrik based his argument on empirical evidence for the period since 1960. Of the 50 countries that experienced growth of 3% or more in GDP per capita during 1960 - 1975, "the golden era of post-war growth", only nine repeated the performance after 1975 (and not all of them were situated in East and Southeast Asia!). The central puzzle, he said, was why so many economies that seemed to be doing well from the 1960s onwards to the mid-seventies started to do so badly thereafter.
Prof. Rodrik rejected the previously accepted link between the debt crisis - a macroeconomic disequilibrium - and import substitution industrialization (ISI), a microeconomic policy option. A case in point was India, which adhered rigidly to ISI policies and was able to avoid protracted debt crises. Evidence showed that the debt crises were "the product of monetary and fiscal policies that were incompatible with sustainable external balances".
The lecture drew on the experience of the Republic of Korea, Turkey and Brazil - all three of which were hit by sizable terms-of-trade shocks during the mid- to late 1970s - to illustrate the importance of the manner in which different societies react to external shocks. In the Republic of Korea - the hardest hit by the trade shock - "adjustment was swift and somehow non-politicized". In Turkey, "adjustment was delayed and when it eventually took place it was undertaken in a manner that imposed disproportionate distributional costs on certain segments of society, undercutting the sustainability of macro-balances in the longer run". In Brazil, there was a "strategic competition among different social groups that gave prices a life of their own and rendered traditional remedies for excess demand costly and ineffective". The results were that the Republic of Korea grew even faster after 1975, while Turkey and Brazil both experienced economic decline.
In those societies where there are deep social cleavages and institutions of conflict management are weak, the economic costs of exogenous shocks -- such as deteriorations in the terms of trade -- are magnified by the distributional conflicts that are triggered, Prof. Rodrik explained. Such conflicts diminish the productivity with which a society´s resources are utilized, including by diverting activities from the productive and entrepreneurial spheres to the political sphere.
A formula for measuring the effect of external shocks on growth, using different combinations of proxies for "latent social conflict" and "institutions of conflict management" was put forward. Countries that experienced the sharpest drops in GDP growth after 1975 were those with divided societies and weak institutions of conflict management. Empirical methodology also showed that government policy at the outset of the crisis regarding openness to trade, government consumption and the debt to exports ratio contributed practically nothing to explaining economic performance after 1975 relative to the earlier period.
"What matters is not whether, but how you globalize"
"The world market is a source of disruption and upheaval as much as it is an opportunity for profit and economic growth. Without the complementary institutions at home -- in the areas of governance, judiciary, civil and political liberties, social insurance, and of course education -- one gets too much of the former and too little of the latter," Prof. Rodrik stated.
The weakness of the domestic institutions of conflict management were the Achilles´ heel of the development strategy pursued in Latin America, Middle East, and elsewhere. This was what made developing countries so susceptible to the external shocks of the 1970s. And, "this weakness persists".
Prof. Rodrik saw at least three components of a domestic strategy of institutional reform required to complement the external strategy of opening up. One was "improving the credibility of the state apparatus" to the judiciary and public bureaucracy, and to root out corruption. The second component was "improving mechanisms of voice", bringing representatives of non-elites - indigenous peoples, workers, peasants - into the decision-making process, to ensure the popular legitimacy of reforms. Finally, "improving social safety nets and social insurance" was extremely important for countries to ensure successful integration into the world economy.
"In the absence of strong institutions at home", Prof. Rodrik concluded, "globalization is likely to foster domestic social conflicts which are damaging not only in their own right, but which are also detrimental to economic growth in the long run".
