Dani Rodrik on Convergence

Dani Rodrik is one of the most interesting and fruitful economists of trade and development around. He’s just put out a new paper on convergence in manufacturing. Not so long ago most people imagined that poor countries would converge towards the wealth of rich countries. In fact there’s no such relationship – though it is true that a bunch of poor countries are catching up to rich countries. But others are not.

His new research demonstrates that the traditional convergence hypothesis actually does apply in manufacturing.

Despite the lack of convergence among economies as a whole, there is apparently quite strong convergence within manufacturing industries.  What this means is that manufacturing sectors that are further away from the technological frontier tend to experience more rapid productivity growth.  And — this is the really interesting part — this happens regardless of the quality of domestic policies, institutions, or geography.  Manufacturing productivity converges even if you are in a remote country with lousy policies and institutions. In economics jargon, manufacturing industries are subject to unconditional convergence.

His informal explanation is that

It is perhaps not surprising that manufacturing industries should exhibit unconditional convergence, and if the estimates here are to be believed, at quite a rapid pace too. These industries produce tradable goods and can be rapidly integrated into global production networks, facilitating technology transfer and absorption. Even when they produce just for the home market, they operate under competitive threat from efficient suppliers from abroad, requiring that they upgrade their operations and remain efficient. Traditional agriculture, many non-tradable services, and especially informal economic activities do not share these characteristics.

One thing that this put me in mind of – though it may be better suited to thinking about developed economies where services are so much larger part of the economy and where ‘sophisticated services’ are increasingly important, is that in services, firstly measuring productivity is often incredibly difficult in any event.  And also in some important – particularly sophisticated – services, regulation and government institutions are so bound up in the production of outputs that, in my opinion it is better to think of such industries not of a competitive market that happens to be regulated and influenced by government but rather as a kind of sophisticated public private partnership. Thus, in our exploration of the scope for financial exports (pdf) some years ago, we said this:

If we were limited to a single finding from our research – if this report stands for a single proposition – it is this.

“Global funds management should be thought of as a joint-product between funds management firms and their regulators (including taxation authorities).”

One could say the same for health and education services and indeed government (which you might think of as just government, but can’t be any good unless it has a sophisticated relationship with everything beyond government. They won’t be provided very productively without a system of interaction and cooperation between collective and competitive aspects of the system that is highly sophisticated. Two things follow from this.  The first is that even where regulatory liberalisation is a worthwhile goal, which it often will be, it’s not an ultimate goal. And that’s because of the second proposition – that the ultimate goal is to have effective interaction and collaboration between the public and private sectors.

And that won’t happen without a lot of institutional reform and indeed perseverance and the passage of time. It’s a very hard thing to get right. That’s not just because the kind of problems that need solving are many, varied and often complex, but also because the kind of collaboration that’s necessary itself is highly complex and indeed subtle. Because close collaboration between public and private sectors can be of the crony capitalist variety (which always exists to some extent) or of the principled variety where there is close and productive collaboration even at the same time that the distinction between the roles of the two sectors are kept scrupulously in mind during the process of collaboration.  And that’s not an easy trick to pull off.