New Delhi: Dani Rodrik is the Rafiq Hariri professor of International Political Economy at the John F. Kennedy School of Government, Harvard University. Most of his research has focused on what constitutes good economic policy and why some governments are more adept than others in adopting them.
Rodrik was in New Delhi last week as a guest of the Confederation of Indian Industry and took some time off to speak to Mint. In a wide-ranging interview, Rodrik maintained that India with its democratic credentials was better placed than China and that there is unlikely to be a double-dip recession in the US though Europe was exhibiting vulnerability. Edited excerpts
Your first thoughts on the emerging global economic crisis?
Obviously the developed world is in a bit of a mess right now, and that may be an understatement. I am much more worried about Europe and euro zone than I am about the US right now. I think the US will muddle along; I don’t know whether there is going to be a double dip or not. But, I feel fairly certain, regardless of whether there is a double dip or not in the next few years, the recovery will at best very sluggish in the US. So, we are looking forward to a period of very slow growth and unemployment remaining at painful levels. I think the situation in Europe is worse and that there is a fundamental structural problem with the euro zone that they haven’t addressed so far; the crisis cannot be addressed under the existing rules of the euro zone. Europe will have to decide to significantly move towards some kind of fiscal and political integration in a rapid way or I fear that there is significant likelihood of dissolution of the European euro zone. Right now the area is stuck in a very unstable position. So there is a lot of uncertainty on my mind about that area.
Unstable position: Rodrik says Europe will have to significantly move towards fiscal and political integration in a rapid way. Priyanka Parashar/Mint
If indeed this scenario does unravel, is it going to cause a global upheaval?
I think the effects will be highly uneven. It depends on how quickly or how dragged out the whole process is; the more dragging out we do, the worse it is going to be. There will obviously be implications because eventually I think there will have to be a lot of debt write-offs and that will have financial implications for banks and financial systems all around the world. But, I think in terms of outcome for individual countries, it depends on how they handle it.
The problems of the US economy look structural, precluding any quick fixes. Your thoughts?
I don’t think there is a quick fix in terms of a rapid reduction in unemployment because there is a fundamental mismatch between the structure of employment before the crisis and what will emerge once we come out of the crisis. Lots of sectors such as finance, construction, housing, lots of manufacturing simply would be not replaced and so the US faces the structural issue: How it is going to create jobs that will replace those that have been lost? I think transitorily some of these issues could be alleviated through better fiscal management—means not overshooting the fiscal correction, which has to happen sometime, but not necessarily immediately; it will only aggravate things. So, I think the debt crisis is created because of a combination of a financial crisis and slow growth and I think nothing will help it more than the rapid growth. Then political conflicts over these issues make things significantly more complicated. So, putting all of it together, that is why my expectation is that we are looking at a period of slow and dragged-out recovery.
Doesn’t that bode badly for Barack Obama’s run for a second term?
It does. But politics is relative. I think the debacle over the debt ceiling has rebounded rather badly on Republicans as well. So the question is...who is going to appear as the more responsible party or the less irresponsible party; and it is still possible that the Democrats and Obama might make relative gains out of this.
There is a case being made to evolve an alternative reserve currency to the US dollar. What are your thoughts?
I don’t think this is such a major issue of all the problems the world economy faces. It is really to me, largely a non-issue. Obviously, the central banks are worried about where they should be putting their reserves. Compared to the amount of forgone revenue due to the inordinate levels of reserves that emerging markets have built up as an unanticipated consequences of financial globalization, the issue of the composition of the reserve asset or the existence of an alternative to the dollar, seems to me to be not required.
How do you see the crisis impacting emerging market economies?
It will vary from country to country. I think in a way, India is better positioned than many other developing countries to continue its rapid growth. I think China’s rapid growth is much more threatened by what’s happening in the West and the US in particular, because their growth model for the last 10-15 years has relied so much on generating larger trade surpluses. That is going to be very hard to sustain, given the period of low growth and the political sensitivity that this surplus will necessarily create. Also, I think there are internal problems in China as well. The global environment is the greater threat to China than it’s to India, where the internal dynamics in India have played a greater role in the recent growth process. So I think it’s possible for India to keep growing at 7-8%, may be not 10%, with the right kind of policies and frameworks in place.
But in the Indian context there are sustainability issues that have cropped up. The recent employment data suggests a case of jobless growth.
Absolutely. So that is the fundamental question for India going forward as exactly as you put it: that some of the most dynamic, rapidly growing sectors of the Indian economy are not those that are not generating the kind of jobs that India is most well endowed with. People talk about the shortage of low-skilled labour these days in India that suggest that the employment problem for the low skilled is not perhaps as bad as one might think; but it is important in the medium term to create the employment capacity to absorb people off the farm, petty trades and services and any form of economic activities. And there I do think that India is starting from a low base, which is both a relative measure of failure, if you will, that manufacturing doesn’t absorb more of employment, but it is also a source of potential catch-up as we go forward because there is a bigger potential of doing this. Indian manufacturing is very, very diversified and we have seen in recent years that it can generate significant gain in world market share in certain areas. So there are underlying strengths there and I do think that with a certain amount of pragmatism and policy experimentation that it might be possible to make progress on that.
Politically, the present government is in a crisis. So there is a loud cry, particularly from Indian business, to kick-start economic reforms or risk losing out all these gains.
I think the business community seems to me a little schizophrenic about this, because they often also say that the best environment is when the government does nothing; and when they start doing things and we get into trouble, you know. From one perspective that may be not such a terrible thing and it all depends upon your expectations about the nature of the reforms, whether it will be good or bad. Clearly, political paralysis is not good news. If I can just step back from all of this and put India in the global and historical context, we have to keep reminding ourselves that India is a miracle in terms of having sustained a democratic regime for such a long time with such a divided society and such a low level of income; and Indian democracy has always worked like this in fits and starts. I think one of the advantages of the democracy is that it doesn’t allow problems to fester and accumulate and they rise up very quickly to the surface. So issues like corruption rise much more quickly to the surface in a place like India. And, if I can compare it to China, for example, the deep-rooted problems that it is facing are not fundamentally different; there is huge amount of corruption in China. But they are festering and sort of weakening the system in a way that when they eventually come out they could prove much more threatening to the regime. In a medium-to-long term sense that makes India so much more resilient than possibly China.
You have always bet on India given its democratic roots. Have recent incidents suggested a rethink?
No. The recent rise in India’s growth rate has made the argument for democracy look even better. It used to be said, people still say it, that India cannot manage growth because they don’t have an authoritarian regime that is needed to undertake all these tough reforms the way that China has; I think that misinterprets the reforms process in China and in any case now we see that India can grow really rapidly as well. So, I think democracy in India is the main reason why I feel much more bullish about India’s economic future than I do about China. Now that China has managed to tinker around sufficient to avoid potential crisis, and that could go on for some time, there is a fundamental fragility in the Chinese system that I don’t think India has.
You have in the past suggested that developing countries should not necessarily rely on the market mechanism. What is the Indian experience?
India’s growth model is a very hybrid model. To the extent that we can talk about India’s growth model in the last 20 years or so, it is a very hybrid model. The reason you can tell it is hybrid is that if India were growing at 2% per annum rather than 8-9% per annum then we will be pointing to the current policies as reason for that; it is just as easy finding the reasons for low growth as it is to find reasons for high growth. That suggests it is a very mixed policy regime. People who worry about the sustainability of growth, they will argue that it is still over-regulated, the labour regime is way too rigid, we have way too much corruption and there hasn’t been enough privatization and so forth. So these are all reasons one might argue why growth may not be sustained. If growth had been low, you would be pointing to the very same thing.
I think the fundamental problem with reforms is that when we are reforming, regardless of what most Western economists will tell you, we actually have a lot of uncertainty about what are the right reforms. There is no single sort of blueprint that makes it clear, even when you are moving directionally towards giving markets free reign, integrating into the world economy. The actual policies, the actual reforms can take many, many different ways and because there is so much uncertainty, regimes that are finding their way by sort of pragmatically moving little bit here and there, and not necessarily making sort of huge leaps into the unknown on the basis of some textbook theory as to how market economies really work, can find that they are doing better.
And, I think that’s the reason why the more pragmatic gradual democratic mode of reforms has not been a bad deal for India even though it leaves you with a state sector that is still very important in production and the financial sector and a regulatory system that is a big mess. On the other hand, we find that if we look at countries in Latin America they made a big leap towards getting rid of all these regulations and turning into market economies. They found their economies facing big uncertainties without generating the rewards in terms of higher investment and higher growth.
So yes, the world is a messy place and reforms that work are messy. When you look at what is going to work you end up with hybrid regimes and to that extent India is very much (one).
So being a hybrid economy is not such a bad thing?
We live in a second-best world. We shouldn’t compare what is happening to some idealized textbook world, where there are always different interests that work, and you can always take care of social problems and distributional issues through mechanisms that don’t interfere in your reform agenda or the growth agenda. But that’s not the kind of world we live in. And in the messy world in which we live, we will work out messy bargains, and we do this by taking those constraints into account, which after all is what democracies are all about. We are more likely to end up doing the right thing than simply overlooking those constraints and presuming that they don’t exist and making sort of big leaps into (the) unknown that sort of backlash and end up in unanticipated consequences.
Moulishree Srivastava contributed to this story.