Governance for a healthy economy

CAMBRIDGE  —  Our world is undergoing an economic transition that will require effective government action on many fronts to manage climate change, ensure public health, and rebuild our middle classes through good jobs and innovation. But are our governments up to it?

There is near-universal skepticism about governments’ ability to lead and achieve positive change. Such doubts may be well-placed. Polarization and authoritarian populism, which are mutually reinforcing, have overrun the public sphere in many countries and undermined societies’ capacity to mount collective action, both domestic and multilateral, against common problems.

Moreover, a longer-standing concern about government is that it has neither sufficient information nor the capabilities necessary to achieve positive structural change in the economy. Give governments too much power, the argument goes, and they will direct resources towards the wrong places and become captive tools of special interests. This argument lies at the heart of neoliberalism, and it will have to be overcome for any successor paradigm, like productivism, to succeed.

A more accurate account of government capabilities recognizes that they are neither inherited nor static. Rather, once appropriate priorities have been set, capabilities develop over time through experience, learning, and trust-building with private entities. For public officials, the relevant question is not “Do we have the capacity?” but, “Have we established the right priorities and the correct mode of governance?”

Sceptics might say that this sounds good in theory but remains unachievable in practice. Just look around, and you can find failures of public governance almost everywhere, locally, nationally, and globally. But, in fact, as Columbia Law School’s Charles Sabel and David Victor of the University of California, San Diego, show in a new book, effective governance models do exist and have already made a big difference. The practice is there; it is the theory that is lacking.

Sabel and Victor focus on climate change, which is the greatest policy challenge of our time. It is also an area where governance is doubly difficult: regulations must not only be effective at the national level; they also must be negotiated globally among states with different interests and circumstances.

Sabel and Victor build their argument on the example of the 1987 Montreal Protocol, which has succeeded in curbing ozone-depleting substances (ODS) to the point where the ozone layer is now on course to full recovery. From the outset, ozone depletion and climate change looked like similar challenges, because both involve significant scientific and technological uncertainty and considerable differences among the positions of advanced and developing economies. That is why the 1992 United Nations Framework Convention on Climate Change (UNFCCC), the first global climate agreement, took the Montreal Protocol as its model.

The Montreal Protocol and the UNFCCC both started out as very “thin” regimes, relying on broad commitments to cut emissions, of ODS and greenhouse gases, respectively by a certain date, but with little operational content. But the two regimes evolved very differently. While the Montreal Protocol made steady progress by bringing firms and governments together to tackle concrete technological problems, climate-change agreements have frequently ended up stalled in global negotiations.

Sabel and Victor call attention to a key difference between the two regimes: the Montreal Protocol created sectoral committees in which ODS-emitting firms joined national regulators and scientists in seeking technological alternatives. These groups started small, but they expanded and multiplied as knowledge was accumulated, capabilities were acquired, and trust was built among parties. This approach worked because the actual problem solving was devolved to local actors, namely, the firms with the requisite technological know-how. When innovation stalled, targets were reset. The result was a virtuous loop of on-the-ground innovation and top-level goal setting.

Under the climate regime, by contrast, firms have been kept at arm’s length from regulators, owing to fears that they would capture the process. But this has entrenched conflicts of interest and hampered innovation.

The Montreal Protocol is not the only successful case of what Sabel and Victor call “experimental governance”. Additional examples can be found across a wide range of national and sub-national programs, from the US Advanced Research Projects Agency, Energy (ARPA-E) to Ireland’s agricultural-pollution regime. In each case, ground-level experimentation is coupled with higher-level goal setting. The successful practices that emerge from these collaborations are then routinised through dissemination and standard setting.

Nor are the success stories limited to environmental policy. ARPA-E, after all, is modeled after the Defense Advanced Research Projects Agency (DARPA), the US agency that is responsible for some of the landmark innovations of our time, including the internet and GPS. At the local level, the most successful initiatives to revitalise communities and create jobs take the form of private-public collaborations that bring together training programmes, businesses, non-profit groups, and public officials to create new pathways to economic opportunity. Effective national industrial policies take a similar collaborative, cross-sectoral approach.

As Sabel and Victor explain, the general strategy in all these domains is to start out with ambitious, somewhat ill-defined goals. Programme leaders must acknowledge the deep uncertainty, and hence the likelihood of mistakes and false starts. There must be incentives for the parties with the most detailed and accurate information, typically firms, to look for solutions, which means that public agencies must establish some combination of sticks, the threat of regulation) and carrots (incentives and public inputs.

Because success depends on frequent reassessments and revisions, setting milestones and monitoring progress is crucial. When solutions do emerge, they can be generalised in the form of standards or regulations. Innovation lies at the centre of this process, because higher living standards, including a cleaner environment and better jobs, are possible only through enhanced productivity.

This kind of policymaking differs significantly from the prevailing approaches. From the experimental-governance perspective, the “state vs market” dichotomy is simply irrelevant. States and markets are complementary, not dichotomous. Economists’ standard top-down, principal-agent model of regulation becomes unhelpful.

To succeed, a new paradigm like productivism will have to transcend the stale ideologies of the past. Fortunately, the models of governance that it needs already exist in abundance.

Dani Rodrik, professor of International Political Economy at Harvard University’s John F. Kennedy School of Government, is president of the International Economic Association and the author of ‘Straight Talk on Trade: Ideas for a Sane World Economy’ (Princeton University Press, 2017). Copyright: Project Syndicate, 2022. www.project-syndicate.org