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Unformatted text preview: Globalisation, Social Conflict and Economic Growth Dani Rodrik 1. Introduction L ET me begin with a confession: until about a month ago, when I began to prepare for this lecture, I had not read any of Raul Prebisch’s writings. I was of course familiar with many of Prebisch’s ideas – his intellectual leadership at ECLA and UNCTAD, the so-called Prebisch-Singer thesis on the deterioration of the terms of trade for primary products, and his advocacy of import protection as a way of speeding up industrialisation. But like most development economists of my generation, I knew Prebisch second hand and mostly as a label associated with a particular type of development strategy. It is no secret that this development strategy – import substituting industrialisation (ISI) – has now been out of favour for a while. By the late 1970s, neoclassical economists were pretty unanimous in their condemnation of the ISI strategy. And about a decade later, policy makers all over the developing world had converged on the same verdict. Prebisch’s name has become tainted by association with an apparently failed development strategy. Today’s conventional wisdom reverses the logic of Prebisch’s argument: those developing countries that took Prebisch’s advice and withdrew from the world economy, the new consensus goes, eventually floundered, while those that embraced trade prospered beyond expectations. Anyone who has read Prebisch more closely – and I am now happy to include myself in this company – would object that the usual characterisation of Prebisch as an advocate of protection ignores a lot of subtleties. Prebisch did not favour indiscriminate protection. He anticipated his later critics by recognising that trade protection on its own would not lead to increased productivity in manufactures, and might even result in the opposite.1 DANI RODRIK is professor of international political economy at the John F. Kennedy School of Government, Harvard University. This is the revised version of the Prebisch Lecture delivered at UNCTAD, Geneva, on 24 October, 1997. The author is grateful to Secretary General Rubens Ricupero for the invitation and for useful comments on the lecture, and to David Greenaway for his suggestions. 1 He wrote: ‘But protection by itself does not increase productivity. On the contrary, if excessive, it tends to weaken the incentive to produce’ (Prebisch, 1959, p.259). ß Blackwell Publishers Ltd 1998, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA. 143 144 DANI RODRIK But my difficulty with the conventional wisdom, as just stated, goes beyond the details. I believe the development community has internalised the wrong lessons from the experience of countries that adopted the ISI strategy in Latin America and elsewhere. The correct interpretation, I think, goes something like this. q q q First, ISI worked rather well for a period of about two decades. It brought unprecedented economic growth to scores of countries in Latin America, the Middle East, and North Africa, and even to some in Sub-Saharan Africa. Second, when the economies of these same countries began to fall apart in the second half of the 1970s, the reasons had very little to do with ISI policies per se or the extent of government interventions. Countries that weathered the storm were those in which governments undertook the appropriate macroeconomic adjustments (in the areas of fiscal, monetary and exchange-rate policy) rapidly and decisively. Third, and more fundamentally, success in adopting these macroeconomic adjustments was linked to deeper social determinants. It was the ability to manage the domestic social conflicts triggered by the turbulence of the world economy during the 1970s that made the difference between continued growth and economic collapse. Countries with deeper social divisions and weaker institutions of conflict management experienced greater economic deterioration in response to the external shocks of the 1970s. Each of these points has considerable empirical support, as we shall see. Taken together, they provide an interpretation of recent economic history that is at odds with much current thinking. By emphasising the importance of social conflicts and institutions – at the expense of trade strategy and industrial policies – they also suggest quite a different perspective on development policy. One of the implications is worth mentioning at the outset. If I am right, the main difference between Latin America, say, and East Asia was not that the former remained closed and isolated while the latter integrated itself with the world economy. The main difference was that the former did a much worse job of dealing with the turbulence emanating from the world economy. It is not openness per se that matters; it is how well you handle it. 2. SOME NUMBERS We have reliable and comparable data on per-capita GDP for most developing countries only since 1960. So I take the period 1960–1975 as the golden era of post-war growth. As Table 1 shows, more than 50 countries experienced growth ß Blackwell Publishers Ltd 1998 GLOBALISATION, SOCIAL CONFLICT AND ECONOMIC GROWTH 145 TABLE 1 Per-capita GDP Growth Rates Country Gabon Singapore Japan Korea Botswana Greece Hong Kong Lesotho Taiwan Portugal Spain Syria Malta Yugoslavia Israel Swaziland Barbados Iran Brazil Morocco Malaysia Nigeria Tunisia Panama Ecuador 1960–75 % 7.87 7.40 7.05 6.47 6.16 6.15 6.12 6.00 5.86 5.68 5.66 5.61 5.46 5.42 4.98 4.76 4.60 4.59 4.57 4.27 4.26 4.15 4.14 4.13 4.04 1975–89 % À3.40 5.10 3.53 7.00 6.17 1.73 6.61 2.15 6.57 2.59 1.64 0.30 5.39 1.04 1.25 À0.86 2.57 À3.60 1.27 2.20 3.82 À2.41 2.25 À0.38 0.48 Country Ireland Finland Thailand Italy Turkey Iceland Belgium Norway France Austria Dominican Rep. Canada Togo Netherlands South Africa Mexico Tanzania Cote d’Ivoire Jamaica Bolivia Nicaragua Costa Rica Sweden Egypt Papua New Guinea 1960–75 % 4.02 3.99 3.94 3.89 3.85 3.80 3.78 3.76 3.73 3.71 3.56 3.52 3.49 3.48 3.39 3.37 3.37 3.30 3.23 3.19 3.11 3.05 3.05 3.04 3.02 1975–89 % 2.70 2.73 4.72 2.80 1.23 2.54 2.08 2.77 1.90 2.29 1.14 2.57 0.22 1.35 À0.39 0.76 n.a. À1.56 À1.35 À0.77 n.a. 0.82 1.45 2.93 À1.27 Source: Penn World Tables. of three per cent or more in GDP per capita during this period. The list includes the East Asian tigers, of course, but also ten countries in Central or South America (Barbados, Brazil, Panama, Ecuador, Dominican Republic, Mexico, Jamaica, Bolivia, Nicaragua and Costa Rica), seven in the Middle East and North Africa (Syria, Israel, Iran, Morocco, Tunisia, Turkey and Egypt), and even nine in Sub-Saharan Africa (Gabon, Botswana, Lesotho, Swaziland, Nigeria, Togo, South Africa, Tanzania and Cote d’Ivoire). The fastest growing country prior to 1975 was not Singapore or Korea, but Gabon! Botswana’s growth rate in 1960– 75 exceeded that of Hong Kong and Taiwan. Table 1 also shows, however, that very few countries sustained their high growth rates after 1975. Of the 50 countries with growth rates exceeding three per cent in 1960–75, only nine repeated the performance after 1975 – seven countries in East and Southeast Asia, plus Botswana and Malta. Why did growth collapse in so many countries? The question can be approached from a different angle, by looking at comparative evidence on productivity growth. Table 2, taken from Collins and Bosworth (1996), shows productivity performance in various regions during three ß Blackwell Publishers Ltd 1998 146 DANI RODRIK TABLE 2 Economic Performance by Period and Region (Annual Average Growth Rates, in Per Cent) 1960–73 GDP per worker East Asia (excluding China) Latin America Middle East South Asia Africa Non-US industrial countries US 4.2 3.4 4.7 1.8 1.9 4.8 1.9 TFP 1973–84 GDP per worker 4.0 0.4 0.5 2.5 À0.6 1.8 0.2 TFP 1984–94 GDP per worker 4.4 0.1 À1.1 2.7 À0.6 1.7 0.9 TFP 1.3 1.8 2.3 0.1 0.3 2.2 0.8 0.5 À1.1 À2.2 1.2 À2.0 0.2 À0.5 1.6 À0.4 À1.5 1.5 À0.4 0.7 0.7 Source: Collins and Bosworth (1996). periods: 1960–73, 1973–84, and 1984–94. Productivity is measured by total factor productivity growth (TFPG). Look first at the figures for 1960–73, which contain a striking finding. During this period both Latin America and the Middle East appear to have experienced higher rates of TFPG than East Asia. Annual average growth rates of TFP during 1960–73 are 2.3 per cent and 1.8 per cent in the Middle East and Latin America, respectively, compared to 1.3 per cent in East Asia. East Asian performance starts to look truly superlative only after 1973, when Latin America and the Middle East began to undergo regress in total factor productivity (as did Sub-Saharan Africa). The moral from these two tables is the following. Had the world come to an end sometime during the mid-1970s, ISI would not have ended up with such a bad reputation, and the East Asian ‘miracle’ would not occupy the central place in development thinking it occupies today. The puzzle is why so many economies that seemed to be doing well took the express train to hell after 1975. Now, it is true that most of the countries that had embarked on ISI strategies in the 1960s became casualties of the debt crisis and related macro syndromes. This is what makes the association between ISI strategies and growth collapses (the latter eventually being transformed into ‘low growth,’ once memories of the high growth period began to fade) superficially plausible and compelling. But there are severe problems with this interpretation. At a conceptual level, I have never seen a good argument about why a set of microeconomic policies, which the ISI policies were, should be necessarily and systematically associated with macroeconomic disequilibrium, which is what the debt crisis represented (see the discussion in Rodrik, 1996). In any case, it is clear that there was nothing foreordained about the debt crisis: some of the countries that adhered most rigidly to ISI policies – India being a chief example – were able to avoid protracted debt ß Blackwell Publishers Ltd 1998 GLOBALISATION, SOCIAL CONFLICT AND ECONOMIC GROWTH 147 crises. As Table 2 shows, the only region of the world that experienced a significant rise in TFPG after 1973 was in fact South Asia (i.e., Bangladesh, India, Myanmar, Pakistan and Sri Lanka), which is not exactly the region that comes to mind when one mentions ‘outward orientation.’ The point is made somewhat more systematically in Table 3, taken from Rodrik (1996) and based on information from Little et al. (1993) and Easterly (1993). The table evaluates the relevance of three types of potential explanations for whether a country succumbed to the 1982 debt crisis or not: (a) the presence of a significant external shock; (b) the quality of monetary and fiscal policies; and (c) the extent of microeconomic policy distortions. The results point unambiguously to macroeconomic policies as the chief culprit. All the countries TABLE 3 Determinants of the Debt Crisis, 1982 Large External Shock Failure to Adjust Monetary and Fiscal Policy Troubled Countries Argentina Brazil Chile Costa Rica Cote d’Ivoire Mexico Morocco Nigeria unweighted average No Yes Yes No Yes No No No Yes Yes Yes Yes Yes Yes Yes Yes Moderately Troubled Countries Colombia Kenya Sri Lanka unweighted average No Yes Yes Yes Yes No Untroubled Countries Cameroon India Indonesia Korea Pakistan Thailand Turkey unweighted average Yes No No Yes No Yes No No No No No No No No 0.2344 0.2620 0.4503 0.2128 0.3814 n.a. n.a. 0.3082 0.2744 0.1218 0.8606 0.4189 0.3054 0.2019 0.4460 0.2818 0.2438 n.a. 0.2675 0.2306 0.2824 Index of Relative-price Distortion Source: Little et al. (1993), Table 4.4, except for the relative-price distortion index which is taken from Easterly (1993). The latter index is the variance of the log input prices (relative to US prices) across commodities, measured in 1980. See Easterly (1993) for the method of calculation and the justification for the index. ß Blackwell Publishers Ltd 1998 148 DANI RODRIK that Little et al. (1993) classify as having been ‘troubled’ are also classified as cases of ‘failure to adjust monetary and fiscal policy’. None of the ‘untroubled’ countries are similarly classified. With regard to price distortions, these were on average no higher (in fact somewhat lower) in the ‘troubled’ countries than in the ‘untroubled’ countries. Likewise, there is no clear-cut pattern where external shocks are concerned. The bottom line is easily summarised. In those countries that experienced a debt crisis, the crisis was the product of monetary and fiscal policies that were incompatible with sustainable external balances; there was too little expenditure reducing and expenditure switching. Trade and industrial policies had very little to do with bringing the crisis on. 3. THE DEEPER DETERMINANTS We have now pushed the puzzle one level deeper. Why did governments in some countries do the obvious thing of adjusting macroeconomic policies and devaluing their currency in a timely fashion while governments elsewhere did not? Consider the experiences of three countries, all of which were hit by sizable terms-of-trade shocks during the mid- to late 1970s: South Korea, Turkey, and Brazil. Korea suffered the greatest external shock, since trade constitutes a much larger share of national income and the income loss associated with a rise in the price of imported oil was correspondingly larger in Korea than in Brazil or Turkey. Yet Korea grew even faster after 1975, while Turkey and Brazil both experienced an economic collapse. At one level, there is no great mystery about these differing experiences. The South Korean government undertook a textbook adjustment in 1980 as soon as signs of a payments imbalance appeared. There was a devaluation, tightening of monetary policy, and a programme aimed at increasing energy efficiency in the economy. The result was a single year with moderate inflation and recession, and growth resumed thereafter (see Aghevli and Marquez-Ruarte, 1985). The Turkish response was quite different. A populist government reacted to the growing current-account deficit in the mid-1970s by going on an unsustainable external borrowing binge. Once foreign bank loans dried up in 1977–78 as a result of concerns about repayment capacity, fiscal and exchangerate adjustments were delayed. Between 1978 and 1980, inflation rose and the economy went into a tailspin. Some semblance of macroeconomic balance was restored in 1980, but at the cost of huge distributional consequences brought about by changes in key relative prices (the real exchange rate, real wages, and the rural-urban terms of trade). These relative-price changes had the effect of transferring income from farmers and workers to the public sector (see Celasun ß Blackwell Publishers Ltd 1998 GLOBALISATION, SOCIAL CONFLICT AND ECONOMIC GROWTH 149 and Rodrik, 1989). They were greatly facilitated by military rule during 1980– 83. These distributional shifts have in turn created a legacy of macroeconomic cycles in Turkey, with real wages going through periods of recovery followed by bust. Largely due to this legacy of instability, inflation has remained high since the early 1980s, and the Turkish economy has underperfomed relative to its potential. In Brazil, widespread indexation prevented an adjustment in relative prices of the kind that eventually took place in Turkey. Even without formal indexation, strategic interaction among social groups resulting in wage-price rigidities appears to have made orthodox adjustment policies of demand restraint extremely costly in terms of output (Simonsen, 1988). Consequently, fiscal and monetary restraint was tried only half-heartedly. The result was a succession of highinflation plateaus: inflation jumped from 50 per cent per year to 100 per cent in 1979, 200 per cent in 1983, 400 per cent in 1987, 1,000 per cent in 1988, and more than 2,000 per cent in 1990. Each failed stabilisation resulted in higher inflation rates than previously, until the real plan of 1994 finally brought price stability. These country stories underscore the importance of the manner in which different societies react to external shocks. In Korea, adjustment was swift and somehow non-politicised. In Turkey, adjustment was delayed and when it eventually took place it was undertaken in a manner that imposed disproportionate costs on certain segments of society, undercutting the sustainability of macro balances in the longer run. In Brazil, strategic competition among different social groups gave prices a life of their own and rendered traditional remedies for excess demand costly and ineffective. In short, social conflicts and their management – whether successful or not – played a key role in transmitting the effects of external shocks on to economic performance. I believe that this is a key insight about economic performance and the manner in which the global economy impinges on it. 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. Let me make this idea a bit more precise and empirical by drawing on one of my recent papers (Rodrik, 1997a). There I argue that in societies where there are deep social cleavages and the 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. Such conflicts diminish the productivity with which a society’s resources are utilised in a number of ways: by delaying needed adjustments in fiscal policies and key relative prices (such as the real exchange rate or real wages) and by diverting activities from the productive and entrepreneurial spheres to the political sphere. Heuristically, the idea can be summarised by the following formula: ß Blackwell Publishers Ltd 1998 150 DANI RODRIK Ágrowth ˆ Àexternal shocks  latent social conflict institutions of conflict management The effect of shocks on growth is larger the greater the latent social conflict in an economy and the weaker its institutions of conflict management. The next step is to quantify this formula. In Rodrik (1997a), I use various proxies for the terms on the right-hand side of the equation. External shocks are measured by the income effects of the volatility of the external terms of trade; ‘latent social conflict’ is proxied by using measures of inequality, ethnic and linguistic fragmentation, and social (dis)trust; ‘institutions of conflict management’ are proxied by using measures of democracy, quality of governmental institutions, and public spending on social insurance. Let me focus here on one combination of proxies, which I call conflict1. This synthetic indicator is constructed in the spirit of the equation above, by multiplying three terms: (i) my measure of external shocks; (ii) an index of ethnic and linguistic fragmentation, to capture latent conflicts; and (iii) the inverse of an index of democracy, to capture the role of institutions (sources for all the data and methods of construction are discussed in Rodrik, 1997a). The result is then transformed into a standardised variable, so that a unit change in conflict1 corresponds to a single standard deviation. Figure 1 summarises the main finding for a sample of 92 countries. The difference in growth rates between 1975–89 and 1960–75 is shown on the vertical axis, while conflict1 is on the horizontal axis. (In both cases, the influence of other possible determinants of growth differentials has been partialed out.2) As the figure shows, there is quite a tight relationship between how high a country ranks on conflict1 and the extent of growth collapse after 1975 (the t-statistic is À3.77). The estimated slope coefficient indicates that a one standard-deviation increase in conflict1 is associated with a growth reduction of 1.2 percentage points. Hence our measure of (externally-induced) social conflict does a very good job of discriminating between countries that managed to hold together after the mid-1970s and those that fell apart. The next set of charts explores the same theme with a number of variations, to demonstrate that this result is not a fluke. Figure 2 excludes the richer countries from the sample, with the result that the slope coefficient increases in absolute value from À1.2 to À1.4 (and remains highly significant). Figure 3 excludes SubSaharan African countries to see if a few African countries with extreme values are driving the result: the answer is decidedly no, since the estimated coefficient The basic regression is one where the growth differential is regressed on a set of regional dummies for Latin America, East Asia and Sub-Saharan Africa as well as growth during 1960–75 (the latter to account for convergence effects). The results are robust to the inclusion of other right-hand side variables. In particular, nothing changes if per-capita GDP in 1975 is substituted for growth during 1960–75 (see Rodrik, 1997a). ß Blackwell Publishers Ltd 1998 2 GLOBALISATION, SOCIAL CONFLICT AND ECONOMIC GROWTH 151 FIGURE 1 Social Conflict and Growth Collapse FIGURE 2 Countries with 1975 GDP Per Capita ` $5000 (in 1985 Dollars) ß Blackwell Publishers Ltd 1998 152 DANI RODRIK FIGURE 3 Excluding Sub-Saharan Africa FIGURE 4 Latin America ß Blackwell Publishers Ltd 1998 GLOBALISATION, SOCIAL CONFLICT AND ECONOMIC GROWTH 153 FIGURE 5 Sub-Saharan Africa FIGURE 6 Using an Alternative Measure of Social Conflict ß Blackwell Publishers Ltd 1998 154 DANI RODRIK and its level of statistical significance are barely affected. Figures 4 and 5 show that the strong negative relationship holds in samples restricted to Latin American and Sub-Saharan African countries, respectively. Finally, in Figure 6, I use a different measure of social conflict (conflict3), which departs from the previous one in two respects: income inequality during the 1970s is substituted for ethno-linguistic fragmentation and an index of the quality of governmental institutions is substituted for democracy. Once again, we discover a tight relationship between our measure and growth differentials, although the estimated slope coefficient is somewhat smaller at À0.7. The bottom line is that this broader perspective contributes substantially to an understanding of the growth collapse that was the common fate of so many countries after the 1970s. Countries that experienced the sharpest drops in GDP growth after 1975 were those with divided societies and weak institutions of conflict management. The severity of the external shocks themselves is distinctly secondary as a determinant of cross-country differences in growth across periods. Furthermore, once latent social conflict and the quality of conflictmanagement institutions are taken into account, we find that various measures of government policy at the outset of the crisis, such as openness to trade or the size of the public sector, contribute practically nothing to explaining economic performance after 1975 (relative to the earlier period). This is shown in Figures 7–9. Each of these figures depicts the additional explanatory power of a specific FIGURE 7 Government Consumption Levels in 1975 as a Determinant of Growth Collapse ß Blackwell Publishers Ltd 1998 GLOBALISATION, SOCIAL CONFLICT AND ECONOMIC GROWTH 155 FIGURE 8 Openness to Trade in 1970–74 as a Determinant of Growth Collapse FIGURE 9 Debt-Exports Ratio in 1975 as Determinant of Growth Collapse ß Blackwell Publishers Ltd 1998 156 DANI RODRIK candidate explanation for the growth collapse, after social conflict is controlled (by including conflict1 in the regression). The three candidates shown are government consumption levels in 1975 (Figure 7), openness to trade (measured by the share of trade in GDP in 1970–74, Figure 8), and the debt-exports ratio in 1975 (Figure 9). In none of these cases is there a statistically significant (partial) association with the growth collapse after 1975. By contrast, the estimated coefficient on conflict1 is robust to the inclusion of these additional variables on the right-hand side. 4. SO WHAT? Understanding what went wrong in the past is important retrospectively. But it is perhaps even more important prospectively, as we prepare for the future. And this is where we join the debate on globalisation. For the main message that I take from the kind of evidence presented here is that it is not whether you globalise that matters, it is how you globalise. The world market is a source of disruption and upheaval as much as it is an opportunity for profit and economic growth.3 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. The weakness of the domestic institutions of conflict management was the Achilles’ heel of the development strategy pursued in Latin America, Middle East, and elsewhere, and this is what made these countries so susceptible to the external shocks of the 1970s. This weakness persists. Reforms in the areas of macroeconomic policy, trade policy, deregulation, and privatisation have not been matched by deeper reforms of political institutions, bureaucracies, judiciaries, and social safety nets. Meanwhile, the world economy has hardly become a safer place – ask the Thais or the Indonesians if you have any doubt. This I believe leaves developing countries highly vulnerable. Without an internal strategy of institutional reform to complement the external strategy of opening up, they risk exposing themselves to the kinds of protracted crises from which many of them have begun to recover only recently. There are at least three components of such a strategy. (a) Improving the credibility of the state apparatus. There has been much progress on the macroeconomic policy front in some countries, especially in Latin America. But now this credibility has to be extended beyond the macroeconomic field. There is a great need to improve the quality of the judiciary There is a large and growing literature on the impact of globalisation on industrialised and developing countries, focusing primarily on the adverse distributional effects. UNCTAD’s (1997) recent report is among the most pessimistic. For other perspectives, see Lawrence (1996) and Rodrik (1997b). The same issues were also treated insightfully in Bhagwati’s 1996 Prebisch Lecture. See Bhagwati (1997). ß Blackwell Publishers Ltd 1998 3 GLOBALISATION, SOCIAL CONFLICT AND ECONOMIC GROWTH 157 and of the public bureaucracy, and to root out corruption. The state cannot play the role of honest broker in mediating social conflict – as it does so often in East Asia – if it is not perceived as honest and competent. (b) Improving mechanisms of voice. There is a need to improve the channels through which non-elites (indigenous peoples, workers, farmers) can make themselves heard, and to bring them (or their representatives) into the decisionmaking councils. The top-down, technocratic style that is well-suited to macroeconomic stabilisation is not well-suited to the challenges of the second stage of reform. These later reforms will not achieve popular legitimacy unless they are perceived to be the result of a broader deliberation at the national level. So from this perspective, a strong, widely-based trade union movement is a good thing, not a bad thing. Having strong, disciplined political parties is a good thing, not a bad thing. A strong executive is also good, but even better when it uses its autonomy to reach out and strike bargains and alliances with the popular sectors. (c) Improving social safety nets and social insurance. It has now become commonplace to point out that market-oriented reforms require social safety nets to prevent people from falling through the cracks. But I don’t think it is sufficiently appreciated what an important role social insurance played in those countries that were the most successful in integrating themselves into the world economy in the postwar period (or reintegrating themselves as in the case of Western Europe). q q In Europe, the idea of providing social protection in order to insulate and cushion broad segments of society from market risks – particularly those having an external origin – was (and to some extend remains) an ingrained habit of mind. We see this in the welfare state that has grown during the postwar era and in the huge growth in income transfers. I think it is only a mild exaggeration to say that the European welfare state was the flip side of the open economy. In East Asia, the same function was performed not by social programmes and income transfers, but by a combination of enterprise policies (such as lifetime employment and the provision of social services), extensive product and labour market regulations (which slowed down the pace of change), and a much more gradual, controlled type of external liberalisation. As we have now come to realise, the approaches in Europe and East Asia both have their problems. What is clear, however, is that the provision of social insurance is an important component of market reforms – it cushions the blow on those most severely affected, it helps maintain the legitimacy of these reforms, and it avoids a backlash against the distributional and social consequences of globalisation. Obviously, there is no ‘how-to’ manual on accomplishing these things. Much more thought and a fair bit of institutional innovation is needed. What is key, ß Blackwell Publishers Ltd 1998 158 DANI RODRIK however, is to recognise that globalisation requires strong institutions at home (of the type I just sketched out). In the absence of such institutions, globalisation is likely to foster domestic social conflicts which are damaging not only in their own right, but are also detrimental to economic growth in the long run. REFERENCES Aghevli, B. and J. Marquez-Ruarte (1985), ‘A Case of Successful Adjustment: Korea’s Experience during 1980–84’, IMF Occasional Paper 39 (Washington, DC). Bhagwati, J. (1997), ‘The Golden Age: From a Sceptical South to a Fearful North’, The World Economy, 20, 3, 256–89. Celasun, M., and D. Rodrik (1989), ‘Debt, Adjustment, and Growth: Turkey’, Book IV of J. Sachs and S. Collins (eds.), Developing Country Debt and Economic Performance: vol. 3, Country Studies – Indonesia, Korea, Philippines, Turkey (Chicago and London, University of Chicago Press). Collins, S. and B. Bosworth (1996), ‘Economic Growth in East Asia: Accumulation versus Assimilation’, Brookings Papers on Economic Activity, 2, 135–91. Easterly, W. (1993), ‘How Much Do Distortions Affect Growth?’ Journal of Monetary Economics, 32, 2, 187–212. Lawrence, R. (1996), Single World, Divided Nations? International Trade and OECD Labor Markets (OECD, Paris). Little, I.M.D. et al. (1993), Boom, Crisis, and Adjustment: The Macroeconomic Experience of Developing Countries, New York (Oxford University Press for the World Bank). Prebisch, R. (1959), ‘Commercial Policy in the Underdeveloped Countries,’ American Economic Review 49, 2, 251–73. Rodrik, D. (1996), ‘Understanding Economic Policy Reform’, Journal of Economic Literature, XXIV, 9–41. Rodrik, D. (1997a), ‘Where Did All the Growth Go? External Shocks, Social Conflict, and Growth Collapses’, unpublished paper (Harvard University). Rodrik, D. (1997b), Has Globalization Gone Too Far? (Institute for International Economics, Washington, DC). Simonsen, M. H. (1988), ‘Price Stabilisation and Incomes Policy: Theory and the Brazilian Case Study’, in Michael Bruno et al. (eds.), Inflation Stabilisation: The Experience of Israel, Argentina, Brazil, Bolivia, and Mexico (MIT Press, Cambridge, MA). UNCTAD (1997), Trade and Development Report, 1997 (Geneva). ß Blackwell Publishers Ltd 1998 ...
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