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'Introduction’, in In Search of Prosperity - Analytic Narratives on Economic Growth

Author: D Rodrik
Date: 2003
Size: 19 pages

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Summary

Why do some countries manage to sustain long periods of economic growth, while others do not? This chapter introduces a collection of case studies charting the economic narratives of selected countries and seeks to explain their success or failure. It argues that country narratives, informed by growth theory and cross-national evidence, can be useful in developing contingent hypotheses for different countries.

The gap in incomes between the world’s rich and poor nations is the central economic fact of our time. These differences must be attributed to differences in long term growth rates. Current research has serious gaps on topics such as China’s rapid growth without private property rights and how the Indian growth rate increased by three percentage points in the early 1980s. This collection seeks to fill such gaps with country studies combining analysis of micro- and macroeconomic policies, institutions, political economy and initial conditions.

It is useful to organise thinking about economic growth into “proximate” and “deep” causes of economic growth. Economists generally look at proximate growth determinants such as human capital accumulation and productivity growth. Deeper determinants are:

• Geography: This determines natural resource endowments, the public health environment and ease of integration with world markets. It can also affect the quality of institutions in terms of colonial history and ‘resource curse’.
• Trade: Recent thinking makes the case that integration into the world economy is the surest route to economic growth. Trade theory does not support this, although the right technological externalities and learning effects along with capital flows can enhance the benefits of trade-openness.
• Institutions: The current view is that they are essential preconditions and determinants of growth, but there remain many unanswered questions in this regard. Which institutions demand priority? What specific institutional forms are required?

Major debates in growth economics are over which of these factors matter most in creating growth. There may not be universal rules about what makes countries grow, but the country narratives yield several important insights:

• The quality of institutions is key: China, Botswana, Mauritius and Australia owe their performance to institutions that create market-oriented incentives. This is true even when policies are not uniformly ‘good’ in the Washington Consensus sense.
• Government policy toward trade does not play nearly as important a role as institution setting. For example Mauritius operated high levels of protection until the end of the 1990s, and yet enjoyed high rates of growth from 20 years before this.
• Geography is not destiny: Botswana and Mauritius both started out with extremely poor initial conditions, which were overcome with good institutions.
• Acquiring good institutions requires experimentation, willingness to depart from orthodoxy and attention to local conditions.
• Relatively modest reforms can trigger high rates of economic growth.
• Sustaining high levels of growth requires constant reform of institutions. The institutions required for growth for a low-income country are qualitatively different from those required by a high-income country.

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Source: Rodrik, D. (ed.), 2003, ‘Introduction’, in In Search of Prosperity - Analytic Narratives on Economic Growth, ed. D. Rodrik, Princeton University Press, Princeton.
Author: John F. Kennedy School of Government, http://www.ksg.harvard.edu/