Trade Policy
Discretionary benefits

Academic economists concerned with policy tend to alternate between theoretical models in which governments can design finely-tuned optimal interventions and those assuming that governments are incompetent and hostage to special interests. In Discussion Paper No. 900, Research Fellow Dani Rodrik investigates when and why policy is effective by assuming instead that countries differ in their endowments of `state capability'. He focuses in particular on export subsidization, on which most theorists agree that successful government programmes must apply simple, uniform rules containing safeguards against their frequent, unpredictable alteration, endow bureaucrats with few discretionary powers, and keep firms and other organized interests at arm's length from policy formulation and implementation.

Rodrik finds no support for these generalizations, however, in case-studies of six developing countries. The most successful programmes, in Brazil and South Korea, were highly complex and selective, differentiated by firm and subject to frequent changes; they gave bureaucrats enormous discretionary powers and entailed close interaction between bureaucrats and firms. In contrast, the least successful programmes, in Bolivia and Kenya, consisted of simple, across-the-board, non-selective subsidies. Rodrik maintains that these differences in outcomes across countries are better explained by variations in two factors. First, `state autonomy' is present when a society's state and administrative apparatus is insulated from organized private interests and therefore able to exercise discipline over them. Second, `policy coherence' entails a clearly articulated, stable, non-conflicting set of policy priorities. The case-studies suggest that policies are most effective when both autonomy and coherence are present (in Brazil and South Korea) but fail when both are absent (in Bolivia and Kenya). Formulation and implementation of coherent programmes may also be successful even when autonomy is lacking, however, albeit at the cost of some abuse (in India and Turkey).

Taking Trade Policy Seriously: Export Subsidization as a Case Study in Policy Effectiveness
Dani Rodrik

Discussion Paper No. 900, February 1994 (IT)