Despite my many disagreements with Dani Rodrik, I’m an admirer. I find his contrarian views on globalization and industrial policy to be a useful corrective. His recent column on how the strength of the Chinese currency impacts growth in the developing world is a wonderful example of Rodrik at his best.

First he highlights the arguments of Arvind Subramanian of the Peterson Institute and the Center for Global Development. Subramanian maintains that China’s effort to keep the RMB undervalued makes it difficult for other countries to compete with its imports, including other countries in the developing world. Then he presents Helmut Reisen’s case that currency appreciation would harm the rest of the developing world because it would slow Chinese growth:

They estimate that a slowdown of one percentage point in China’s annual growth rate would reduce low-income countries growth rates by 0.3 percentage points – almost a third as much.

This could derive from the fact that China imports raw materials and agricultural products from a number of other developing countries (Brazil is a paradigmatic example), as well as developed countries like Australia, Canada, and the United States.

Rodrik suggests that Subramanian is right and that Reisen is wrong. Excessive reliance on foreign demand might delay the kind of domestic structural change that developing countries need to create sustainable growth:

From this perspective, China’s currency policies not only undercut the competitiveness of African and other poor regions’ industries; they also undermine those regions’ fundamental growth engines. What poor nations get out of Chinese mercantilism is, at best, temporary growth of the wrong kind.

This is a pretty damning indictment, yet Rodrik allows that China has every reason to pursue its own interests, even if doing so comes at the expense of the world’s poorest countries.

Having praised Rodrik, let me just say that I take strong exception to this post:

Spain, where unemployment has risen to 20% and domestic demand has yet to recover, has just approved a labor reform law that makes it easier for employers to dismiss workers.
I hope someone from the IMF or OECD — the two institutions responsible for convincing the Spaniards that such a reform is an urgent priority — will explain to me how reducing the cost of firing workers can lower unemployment in the midst of a decline in labor demand.

I have a straightforward theory of what’s going on here. Liberalizing labor markets might not reduce unemployment during a severe downturn. But it is likely to improve the state of the labor market over the long-run, as suggested by Germany’s experience with the Agenda 2010 reforms. When we make it easier to fire, firms become less reluctant to hire once the broader economic environment improves. And an economic downturn gives a government the leverage it needs to push through unpopular labor market reforms. My guess is that Rodrik will have a thoughtful objection to this story, but I’d like to hear it.

P.S. Arpit Gupta flags Rodrik’s reply to this line of argument:

I have no difficulty with firing costs increasing unemployment when labor demand picks up. My incomprehension has to do with how it could do this when labor demand remains depressed.
And remember if firing costs prevented some employers from dismissing workers on the downswing, employers (your restaurant owner in Madris, adam) must now have some extra workers that — absent firing costs — they wouldn’t employ. So reducing those costs will simply make it easier for them to lay off those workers. Unless that is we see a real increase in aggregate demand, which we are not seeing.

As Arpit suggests, it is also true that making it easier to fire could reduce the shadow price of a unit of labor, which could in turn lead to more hiring. I also think that fact that policymakers are less likely to take this step in a better economic climate is worthy of note.