Wednesday, May 20, 2009

Rodrik's post on governance has substantial potential to mislead

It's important to be careful in discussing the link between good governance and economic growth because it's easy to mislead. First, there's what you define as "good governance", and second there's the issue of whether you're talking about direct effects, indirect effects, or total effects.

For example, Harvard economist Dani Rodrik talk's about how a good industrial policy can be very helpful. The government makes the decision whether to implement a good industrial policy, so you could say that how good you call governance is based in part on this.

Likewise, the policies and ingredients for moving out of poverty that Rodrik describes in his book, "One Economics, Many Recipes", are highly dependent on government actions. Certainly a government which pursues those things aggressively and intelligently (and you could certainly think this is an important part of what's called "good governance") greatly increases the odds of the country quickly moving out of poverty, especially as opposed a government which does the opposite – very harmful things to development.

Rodrik might say that he defines good governance not this way, but as democratic, transparent, non-corrupt, etc., but it looks like you could make a good case that even with these things, usually, or often, depending on other particulars, the more you have, the better the policies and environment will be for moving out of poverty.

I especially think Rodrik's apparent claim that the U.S. in the 2000s is an example of how a country can have terrible economic results with good governance, and so good governance can be a non strongly positive factor, is dead wrong (or at least has great potential to mislead about very important things).

The example actually shows the exact opposite. It shows the great impact good governance (as I think most people would interpret the term) can have on economic growth and wealth.

The quality of governance plummeted astoundingly with the take over of Bush and the Republicans from Clinton and a more balanced mix of power in the rest of government – and the drop in wealth, efficiency, and growth that resulted from this was amazing over a period as short as eight years. They brought us from an overall sound economy and record surpluses to record deficits and the brink of a depression in a mere eight years, and if we had just a few more years of their governance, we probably would have had a depression.

The Bush years were just the opposite of what Rodrik apparently claimed; they were an amazing example of the how much bad governance can hurt economic growth.

And the Clinton and Obama periods are an amazing example of how much good governance can help economic growth, especially if you don't want all of the growth (and more) going to the rich.

And even if you call good governance just democraticness, lack of corruption, transparancy, etc., it was not having enough of those things that allowed Bush and the Republicans to seize power in the 2000 election; it was not having enough of those things that greatly aided them in doing so much harm. And I'm not talking about just the corrupt Supreme Court decision; I'm talking about the Electoral College; I'm talking about the fact that there are no run-off elections so that a Nader can cause the more popular of the two top candidates to lose; I'm talking about the fact that Wyoming has the same voting power in the Senate as California, and the District of Columbia, which has more people than Wyoming, gets zero voting power in the senate; I'm talking about how corporations can donate enormous sums to help politicians, and more.

But, it was having enough democraticness, lack of corruption, transparency, etc. which allowed us to make the amazingly positive change in 2008, in economics and so many other areas, of going from Republican control to Democratic.

Now, that was a roaring place to end, but my primary purpose of writing this blog is to teach, and discuss for important understanding. This takes a priority far higher than "good writing style". So I will continue with two statements by Dani that I think it's important to respond to:

"Johnson argues that U.S. economic policies have been captured by a (financial) oligarchy, in much the same way that business elites corrupt policy-making in much poorer countries such as Russia. The U.S., it turns out, is not that different."

Even in the darkest depths of Republican control, the U.S. was still far better than Russia in this regard. Plus, look at how quickly the U.S. Democratically pulled out of corrupt and incompetent control by electing the Democrats. It's far harder and takes far longer for Russians to identify and expel corrupt and incompetent administrations than Americans precisely because Americans have much better democraticness, lack of corruption, transparency, etc.

"After all, no-one can deny that the United States, for all its financial follies, is a rich country. It turns out that it is possible to be corrupt in a fundamental way and still be rich."

Not if you continue that way. Not if the U.S. had stayed that way. If the U.S. had kept Republican control, there would have been a depression lasting many years, and after that a long-term descent towards banana republic status. After a few generations, other first world countries would have left us far behind. But again, that's where good governance, as defined by democraticness, lack of corruption, transparency, etc., can be so valuable. It can allow a nation to kick out a really harmful, corrupt, and incompetent administration relatively quickly and easily.