Saturday 30 April 2022

Dani Rodrik on the benefits of economic populism

I just read an interesting 2018 article by Dani Rodrik (Harvard University), published in the AER Papers and Proceedings (ungated here). Rodrik starts by outlining a taxonomy of regimes, based on whether there are political restraints and/or restraints on economic policy, resulting in the following 2x2 matrix (Table 1 from the article):

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Rodrik describes the four possibilities in the 2x2 matrix as:

Personalized regimes such as Vladimir Putin’s in Russia or Tayyip Erdogan’s in Turkey are characterized by the absence of restraints in both the political and economic domains (box 1). But it is possible to conceive of autocratic regimes where important aspects of economic policy are placed on automatic pilot or delegated to technocrats (box 2). Pinochet’s regime in Chile provides an example.

Alternatively, a regime can be populist in the economic sense without rejecting liberal, pluralist norms in the political domain (box 3). Finally, a regime that is constrained in both politics and economics might be called a “liberal technocracy” (box 4). The European Union may be an example of the last type of regime: economic rules and regulations are designed at considerable distance from democratic deliberation at the national level, which accounts for the frequent complaint of a democratic deficit.

The rest of the article then mostly discusses the differences between regime (3) and regime (4), drawing an important distinction between two types of restraints on economic policy. First, there are:

...restraints on economic policy that take the form of delegation to autonomous agencies, technocrats, or external rules. As described, they serve the useful function of preventing those in power from shooting themselves in the foot by pursuing short-sighted policies.

Rodrik provides the example of delegating monetary policy to an independent central bank, or constraining trade policy through the use of free trade agreements. In terms of the second type of restraint on economic policy:

Commitment to rules or delegation may also serve to advance the interests of narrower groups, and to cement their temporary advantage for the longer run. Imagine, for example, that a democratic malfunction or random shock enables a minority to grab the reins of power. This allows them to pursue their favored policies, until they are replaced. In addition, they might be able to bind future majorities by undertaking commitments that restrain what subsequent governments can do.

Rodrik again uses the example of monetary policy, where a central bank's rigid adherence to inflation targeting can make us worse off, and to trade policy, where rules on intellectual property are exported and this extends the market power of holders of intellectual property rights.

Then comes the crux of Rodrik's argument - that economic populism, where the constraints on economic policy are relaxed or removed, may actually be beneficial in some cases. In particular, since:

...delegation to independent agencies (domestic or foreign) occurs in two different contexts: (i) in order to prevent the majority from harming itself in the future; and (ii) in order to cement a redistribution arising from a temporary political advantage for the longer term. Economic policy restraints that arise in the first case are desirable; those that arise in the second case are much less so.

Rodrik uses the substantial economic policy changes wrought by Franklin D. Roosevelt and the New Deal as an illustrative example. This paper presents an interesting framework to think about when constraining government economic policy may be a good idea, and when it may be better to relax the constraints. However, the short format of the article prevents a deeper examination of all of the implications of this framework. As described, I'm sure it could be used opportunistically to argue in favour of relaxing constraints in almost any situation. Hopefully, this is a topic that Rodrik is going to follow through on, as it really needs a book-length treatment (and I've quite enjoyed some of his other books - see reviews here and here).

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