Review: Shared Prosperity in a Fractured World: Dani Rodrik

Yesterday I went to a seminar about economic policy relating to climate change which was basically a book launch for Shared Prosperity in a Fractured World. I was sufficiently impressed to buy the book. Here are some key takeaways from the seminar and the first few chapters of the book which I have read today.There are 3 primary challenges to address and they are to some extent linked with tradeoffs.

1. Climate change - failure to address this has severe consequences for global health as well as the global economy and we are already experiencing more frequent and worse extreme weather. The main way to address climate change is to promote green industry based on renewable energy.
2. Reducing global poverty - this is always a good thing. The usual way out of poverty is economic growth but that is quite strongly linked to increasing energy use and GHG emissions which is bad for (1). Also people living in poverty do not buy much so markets shrink which  makes it more difficult to address (3)
3. Rebuilding the middle class - When the middle class feels insecure they tend to react with a retreat to populism and fear of immigrants or automation 'taking their jobs' The main way to rebuild the middle class is to ensure they can have good jobs.  So we need growth in job friendly sectors such as retail and health care. In this context good jobs means security and satisfaction.

(There seems to be something magic about '3'. I am reminded of the 3 requirements for energy provision that it is cheap, clean and reliable. However these three are more obviously in tension. It is easy to satisfy any two simultaneously but all three is hard.)

Another key finding from Rodrik's book is that we need to promote the services economy over manufacturing. This surprising result is partly because manufacturing needs energy and the wrong sort of energy brings on climate change but mainly because productivity improvements in manufacturing lead to job losses anyway whereas services jobs are harder to automate and hence tend to be job friendly. Unfortunately it is quite hard to get growth in services from increasing productivity because these jobs are difficult to automate or scale even with AI, and in any case AI is not reliable and probably never will be.

Secondly, whereas climate change and global poverty are global problems, the solutions had better not require much in the way of co-operation across international boundaries as this proves ever more elusive. That means solutions such as cap-and-trade which rely on agreements between countries are hard to implement. A strong World Trade Organisation would help but in practice the WTO has no actual teeth (certainly not military ones).  In the meantime,, governments nearly always select policies which they see as benefitting their own people, not taking into account that strengthening markets should benefit all sides - trade is not a zero sum game. No-one will buy or sell more of something if the overall cost/benefit balance is high on cost. Finally, a strong middle class helps to support democracy which is also important for political and economic stability.

Pragmatically, the obvious best solutions are often unachievable and it is more productive to go for pragmatic 'second best' solutions even if they are a bit messy and need a bit of tinkering over time.

How to foster growth in the service sectors? Incentivising and empowering local companies to expand employment is one approach. That can mean support with training or cheaper loans, especially for infrastructure. 

No-one is perfect at picking 'winners' and another key skill is recognising when to abandon your losses. Investing for impact is good. while flogging a dead horse achieves nothing. You might call this experimentation which sounds risky but it is difficult to achieve much unless you accept a bit of risk. Spreading the risk is key to making a reliable profit, in all kinds of investment. 

It used to be the case that for developing countries having cheap labour gave them a trade advantage but this is less critical now as quality is often as important as cost. No-one wants to be take pills with bad side effects or buy socks that wear quickly into holes.

I find all these sentiments both more attractive and more realistic than hard economic theory such as neoliberalism. Free markets work very badly when there are externalities that are hard to quantify, or when contracts are impossible to enforce.