Dani Rodrik's new blog

Harvard's Dani Rodrik has a new blog. Since the last thing I need it one more blog to follow, I decided I'd find out a bit more about Rodrik before adding a link to both my sidebar and my blog reader. What I found, with a bit of digging, impressed me. Rodrik stresses a move away from free-market fundamentalism and toward developing "industrial policy that maximizes its potential to contribute to economic growth while minimizing the risks that it will generate waste and rent-seeking." As long as we view "economic growth" as qualitative improvement with an eye toward sustainability, I'm along for the ride. Here is a snip from one of Rodik's recent papers:

INDUSTRIAL POLICY FOR THE TWENTY-FIRST CENTURY
Dani Rodrik, Harvard University
(paper prepared for United Nations Industrial Development Organization (UNIDO)
This version Septemeber, 2004

Once upon a time, economists believed the developing world was full of market failures, and the only way in which poor countries could escape from their poverty traps was through forceful government interventions. Then there came a time when economists started to believe government failure was by far the bigger evil, and that the best thing that government could do was to give up any pretense of steering the economy. Reality has not been kind to either set of expectations. Import substitution, planning, and state ownership did produce some successes, but where they got entrenched and ossified over time, they led to colossal failures and crises. Economic liberalization and opening up benefited export activities, financial interests, and skilled workers, but more often than not, they resulted in economy-wide growth rates (in labor and total factor productivity) that fell far short of those experienced under the bad old policies of the past.

Few people seriously believe any more that state planning and public investment can act as the driving force of economic development. Even economists of the left share a healthy respect for the power of market forces and private initiative. At the same time, it is increasingly recognized that developing societies need to embed private initiative in a framework of public action that encourages restructuring, diversification, and technological dynamism beyond what market forces on their own would generate. Perhaps not surprisingly, this recognition is now particularly evident in those parts of the world where market-oriented reforms were taken the farthest and the disappointment about the outcomes is correspondingly the greatest ….

Therefore we now confront a rare historic opportunity. The softening of convictions on both sides presents an opening to fashion an agenda for economic policies that takes an intelligent intermediate stand between the two extremes cited above. Market forces and private entrepreneurship would be in the driving seat of this agenda, but governments would also perform a strategic and coordinating role in the productive sphere beyond simply ensuring property rights, contract enforcement, and macroeconomic stability.

This paper is a contribution to one component of such an agenda, focusing on policies for economic restructuring. Such policies have been called in the past "industrial policies," and for lack of a better term, I will continue to call them as such. I will use the term to apply to restructuring policies in favor of more dynamic activities generally, regardless of whether those are located within industry or manufacturing per se. Indeed, many of the specific illustrations in this paper concern non-traditional activities in agriculture or services. There is no evidence that the types of market failures that call for industrial policy are located predominantly in industry, and there is no such presumption in this paper.

The nature of industrial policies is that they complement–opponents would say "distort"–market forces: they reinforce or counteract the allocative effects that the existing markets would otherwise produce. The objective of this paper is to develop a framework for conducting industrial policy that maximizes its potential to contribute to economic growth while minimizing the risks that it will generate waste and rent-seeking.

I shall argue that in order to achieve this objective we need to think of industrial policy in a somewhat different light than is standard in the literature. The conventional approach to industrial policy consists of enumerating technological and other externalities and then targeting policy interventions on these market failures. The discussion then revolves around the administrative and fiscal feasibility of these policy interventions, their informational requirements, their political-economy consequences, and so on. I start also from generic market failures, but then I take it as a given that the location and magnitude of these market failures is highly uncertain. A central argument of this paper is that the task of industrial policy is as much about eliciting information from the private sector on significant externalities and their remedies as it is about implementing appropriate policies. The right model for industrial policy is not that of an autonomous government applying Pigovian taxes or subsidies, but of strategic collaboration between the private sector and the government with the aim of uncovering where the most significant obstacles to restructuring lie and what type of interventions are most likely to remove them. …