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. Last Updated: 07/27/2016

Question of Openness




Another international rescue has failed. Last summer, Russia; last week, Brazil. The carnage inevitably raises questions about the rescue strategy. But the latest failures, and the turbulence of the past 18 months, raise deeper questions, too. For years Washington policy-makers and economists have taken for granted the virtue of a more open world economy. Looking around the world now, as one economy after another comes up limping, you have to ask: Were they wrong?


On the narrower question, the rescuers - the Clinton administration and the International Monetary Fund - are, as always, sticking to their guns. The advice was sound; Brazil just didn't follow it. But if you keep giving advice that democratic countries such as Russia and Brazil find politically impossible to follow, it's reasonable to ask if the advice is fair.


This is not to absolve Russia or Brazil. Primary responsibility for fiscal laxity and over-borrowing - for their economic mess - lies with them. But it isn't fair, or smart, to demand a socially unacceptable level of economic pain - of unemployment and business bankruptcies - to defend currencies at levels that everyone acknowledges are too high. To do so pleases Wall Street, as long as it works, as well as some fixed-currency ideologues on the right. But it makes failure, when it comes, much costlier, and it puts the brunt of that failure on poor Brazilians who can afford it least.


Official Washington hasn't flinched from its broader defense of a more integrated global economy, either. But last week Dani Rodrik, a professor at Harvard's Kennedy School and an adviser to the Overseas Development Council, challenged the dominant religion.


In a new book, Rodrik questions the value to developing countries of increasing economic integration, of ever-expanding trade and capital flows. Openness is not essential to economic growth, he argues. It's likely to widen inequality within countries. And, as recent events demonstrate, it leaves developing nations vulnerable to debilitating financial shocks.


His conclusion: Policy-makers should "not let international economic integration dominate their thinking on development."


It's a seductive argument, and it's right in many particulars. Asia's success stories in the early stages of their development did not follow every tenet of the openness ideology, such as low tariffs for all goods and totally liberal capital markets.


But they did, each in different ways, view economic integration as crucial. They did hitch their small domestic economies to the larger and more technologically advanced economies of Japan and the United States. And, even with all the pain and disruption of the past 18 months, countries such as South Korea, Taiwan and even Indonesia are far more prosperous today than they would have been had they not emphasized trade and integration two and three decades ago.


Jeffrey Sachs, also a Harvard economist, says Rodrik is right to suggest that openness is not enough to spark growth, but wrong to underestimate its importance. "Yes, investment counts, institutions count," Sachs says. "But the way you develop in this world is to be productive as part of the world system."


To grow, you need science and technology, 99 percent of which comes from the United States, Europe and Japan. Even countries as big as Russia and India have shown you can't prosper without taking your place in the international food chain. The country that succeeds, Sachs says, to a large extent will be the country that attracts the Intel factory.


As true as that was for South Korea 30 years ago, it is far truer for poor countries today. From 1985 to 1994, the world economy grew at an annual rate of 3.2 percent, while direct foreign investment - companies such as Intel building factories outside their home countries - grew at 14.3 percent. This resulted partly from rules imposed by the openness ideologues, it's true, that knocked down barriers to investment. But even more, it reflected changes in technology and transportation that are oblivious to economists' likes or dislikes.


What this means is that the impetus toward economic integration won't go away - and neither will the dangers of openness that Rodrik cites. A painful jousting will continue between legitimate interests of national sovereignty and a legitimate desire for rules that operate fairly across borders.


To this difficult balancing act - as difficult in Washington as in developing nations, as the debate over trade legislation has shown - Rodrik prescribes a bit more humility on the establishment's part. After all, he points out, the IMF and World Bank were as certain 20 years ago as they were two years ago about what was best for the developing world, but what they were certain of has changed radically.


"We know a lot less about what makes for good economic policy than we recognize," Rodrik says. Just ask the Brazilians.


The current financial crisis has sparked many calls for a new "financial architecture" - a system of global capitalism that everyone could live by, and that assumes every country will evolve toward a similar capitalist model. Rodrik asks something different: What set of rules might allow many different forms of national capitalism to peacefully coexist? The answer to that one isn't necessarily any easier. But it always helps to start with the right question.


Fred Hiatt is a member of The Washington Post's editorial-page staff.