Development piecemeal
08/09/2004 | line305b
http://www.economist.com/printedition/displayStory.cfm?Story_ID=3062127
Íå ïî òåìå, íî èíòåðåñíî...
Development piecemeal
Aug 5th 2004
From The Economist print edition
Small policy changes, not upheaval, may be the trigger of economic growth
OVER the past 15 years or so, economists have developed a long list of now-familiar remedies for developing countries hoping to grow their way to prosperity. This “Washington Consensus” includes the removal of trade protection and the introduction of deregulation, as well as fiscal and monetary discipline. And these are just for starters. The trouble is that many governments find it almost impossible to stick to these prescriptions. Meanwhile, other economists have suggested that development depends not on specific policies but on “institutional” factors, such as a respect for property rights, which constrain the powers of the state. This can sound like a counsel of despair, because such institutions and customs can take many years, even centuries, to become established.
However, two new studies suggest that there is no need to be so gloomy. They argue that institutional overhaul and broad economic reforms are not necessary to spur economic growth. In fact, quantitative evidence that they do so is surprisingly difficult to find. Smaller policy changes may serve just as well, and pave the way for later reforms of institutions.
In one of these papers*, Edward Glaeser, a Harvard economist, and three co-authors question several prominent studies that treat institutions as a wellspring of development (including those discussed in this column in the issue of October 5th 2002). Mr Glaeser and his colleagues point out a problem with theories stressing the importance of institutional reform: it is fiendishly hard to find a quantitative measure for institutional quality that can be plugged into a statistical model explaining economic growth. They show that the measures typically used in such studies—such as “risk of expropriation” or “government effectiveness”, which are often based on investor surveys—merely reflect the result of governments' behaviour, not of reasonably permanent and durable institutional features, such as the protection of property rights and contracts. Indeed, in some countries, such as Argentina, the standard indices of “institutions” fluctuate wildly with the electoral cycle. Sometimes a dictator chooses to secure property rights without enshrining it in the rules, as in South Korea until the 1980s; sometimes he does not. The authors find that “there is no relationship between growth and constitutional measures of institutions.”
This is not to say that guaranteed rules of the game are unimportant in sustaining growth, as opposed to sparking it. However, countries tend to escape poverty in the first place through good policies. Only then do they go on to improve their institutions, the authors argue. Andrei Shleifer, one of the researchers, points to China. The policies introduced by Deng Xiaoping from 1978 led to economic growth and the emergence of a vibrant middle class, which in turn demanded formal guarantees, such as this year's constitutional amendment defining property rights as “inviolable”. The point is that institutional reforms came after the policies that fostered growth; they did not precede it.
Reform something, anything
So what does cause growth to take off? Another recent study† finds that the spark can be a surprisingly small change in policy. The researchers, at Harvard's Kennedy School of Government, looked at 83 instances between 1957 and 1992 in which annual GDP growth increased by at least two percentage points and the higher growth was sustained for at least eight years.
These bursts of growth were not normally preceded by a big shift in policy, or by full-blown economic and political reforms—such as liberalisation or a move towards democracy. This is something the authors are at a loss to explain. Financial liberalisation does help stimulate growth for a while. More investment and exports and a competitive real exchange rate can also give a temporary boost. And positive external shocks (such as a rise in the price of an exported commodity) tend to hasten growth that quickly fizzles out.
What struck the authors was the humble nature of the initial triggers of growth. These usually consist of nothing more than relaxing specific constraints on private activity. In South Korea in 1964, devaluation and an increase in interest rates overseen by the dictatorship of General Park Chung Hee brought the returns to private investment closer into line with those to the economy as a whole. In 1983, General Augusto Pinochet pulled the same trick in Chile. In China in 1978, the ruling party introduced market-oriented incentives. In India in 1980, Indira Gandhi removed shackles from enterprises and began sending pro-business signals, a decade before more formal reforms (although there is a hot debate about which set of policies mattered most). Policymakers, say the authors, have merely to identify the relevant constraints. “Instigating growth is a lot easier in practice than the standard Washington recipe, with its long list of institutional and governance reforms, would lead us to believe,” writes Dani Rodrik, one of the authors, in a separate article‡.
However, grander reforms do seem to be correlated with take-offs in growth that are sustained over a longer period, of 15 years or more. This suggests that big reforms are not needed to start growth, but they are a great help in keeping it going. And at the outset an awful lot still comes down to luck. “There was nothing inevitable about Deng [Xiaoping],” Mr Shleifer says. “It just so happened that they [the Chinese] picked a dictator who decided to give some protection to property rights.” Hopefully China has now moved too far in the direction of a market economy for some new leader abruptly to change his mind.
* “
Do institutions cause growth?” by Edward Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer. NBER Working Paper No. 10568.
† “Growth accelerations” by Ricardo Hausmann, Lant Pritchett and Dani Rodrik. NBER Working Paper No. 10566.
‡ “Getting institutions right”. CESifo DICE Report, Summer 2004
Íå ïî òåìå, íî èíòåðåñíî...
Development piecemeal
Aug 5th 2004
From The Economist print edition
Small policy changes, not upheaval, may be the trigger of economic growth
OVER the past 15 years or so, economists have developed a long list of now-familiar remedies for developing countries hoping to grow their way to prosperity. This “Washington Consensus” includes the removal of trade protection and the introduction of deregulation, as well as fiscal and monetary discipline. And these are just for starters. The trouble is that many governments find it almost impossible to stick to these prescriptions. Meanwhile, other economists have suggested that development depends not on specific policies but on “institutional” factors, such as a respect for property rights, which constrain the powers of the state. This can sound like a counsel of despair, because such institutions and customs can take many years, even centuries, to become established.
However, two new studies suggest that there is no need to be so gloomy. They argue that institutional overhaul and broad economic reforms are not necessary to spur economic growth. In fact, quantitative evidence that they do so is surprisingly difficult to find. Smaller policy changes may serve just as well, and pave the way for later reforms of institutions.
In one of these papers*, Edward Glaeser, a Harvard economist, and three co-authors question several prominent studies that treat institutions as a wellspring of development (including those discussed in this column in the issue of October 5th 2002). Mr Glaeser and his colleagues point out a problem with theories stressing the importance of institutional reform: it is fiendishly hard to find a quantitative measure for institutional quality that can be plugged into a statistical model explaining economic growth. They show that the measures typically used in such studies—such as “risk of expropriation” or “government effectiveness”, which are often based on investor surveys—merely reflect the result of governments' behaviour, not of reasonably permanent and durable institutional features, such as the protection of property rights and contracts. Indeed, in some countries, such as Argentina, the standard indices of “institutions” fluctuate wildly with the electoral cycle. Sometimes a dictator chooses to secure property rights without enshrining it in the rules, as in South Korea until the 1980s; sometimes he does not. The authors find that “there is no relationship between growth and constitutional measures of institutions.”
This is not to say that guaranteed rules of the game are unimportant in sustaining growth, as opposed to sparking it. However, countries tend to escape poverty in the first place through good policies. Only then do they go on to improve their institutions, the authors argue. Andrei Shleifer, one of the researchers, points to China. The policies introduced by Deng Xiaoping from 1978 led to economic growth and the emergence of a vibrant middle class, which in turn demanded formal guarantees, such as this year's constitutional amendment defining property rights as “inviolable”. The point is that institutional reforms came after the policies that fostered growth; they did not precede it.
Reform something, anything
So what does cause growth to take off? Another recent study† finds that the spark can be a surprisingly small change in policy. The researchers, at Harvard's Kennedy School of Government, looked at 83 instances between 1957 and 1992 in which annual GDP growth increased by at least two percentage points and the higher growth was sustained for at least eight years.
These bursts of growth were not normally preceded by a big shift in policy, or by full-blown economic and political reforms—such as liberalisation or a move towards democracy. This is something the authors are at a loss to explain. Financial liberalisation does help stimulate growth for a while. More investment and exports and a competitive real exchange rate can also give a temporary boost. And positive external shocks (such as a rise in the price of an exported commodity) tend to hasten growth that quickly fizzles out.
What struck the authors was the humble nature of the initial triggers of growth. These usually consist of nothing more than relaxing specific constraints on private activity. In South Korea in 1964, devaluation and an increase in interest rates overseen by the dictatorship of General Park Chung Hee brought the returns to private investment closer into line with those to the economy as a whole. In 1983, General Augusto Pinochet pulled the same trick in Chile. In China in 1978, the ruling party introduced market-oriented incentives. In India in 1980, Indira Gandhi removed shackles from enterprises and began sending pro-business signals, a decade before more formal reforms (although there is a hot debate about which set of policies mattered most). Policymakers, say the authors, have merely to identify the relevant constraints. “Instigating growth is a lot easier in practice than the standard Washington recipe, with its long list of institutional and governance reforms, would lead us to believe,” writes Dani Rodrik, one of the authors, in a separate article‡.
However, grander reforms do seem to be correlated with take-offs in growth that are sustained over a longer period, of 15 years or more. This suggests that big reforms are not needed to start growth, but they are a great help in keeping it going. And at the outset an awful lot still comes down to luck. “There was nothing inevitable about Deng [Xiaoping],” Mr Shleifer says. “It just so happened that they [the Chinese] picked a dictator who decided to give some protection to property rights.” Hopefully China has now moved too far in the direction of a market economy for some new leader abruptly to change his mind.
* “
Do institutions cause growth?” by Edward Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer. NBER Working Paper No. 10568.
† “Growth accelerations” by Ricardo Hausmann, Lant Pritchett and Dani Rodrik. NBER Working Paper No. 10566.
‡ “Getting institutions right”. CESifo DICE Report, Summer 2004