Why do some countries prosper and others do not?
Recently, the Growth Commission released its final report on this issue. The commission was supported by the governments of Australia, Sweden, the Netherlands and the UK, the William and Flora Hewlett Foundation and the World Bank. It was chaired by Michael Spence (2001 Nobel laureate), and brought together 21 top economists and policymakers to share their views on what leads to growth within economies. Not surprisingly, the report has led to numerous comments in newspapers and blogs, with appreciation and criticism in equal measure. Economist Bill Easterly criticized it, Financial Times columnist Martin Wolf called it a “pragmatic guide” and economist Dani Rodrik said it reflects a “broader intellectual shift”.
What leads to growth is one of the most important questions an economist faces. After all, that is what we study economics for—to make the lives of people better and help economies prosper. Unfortunately, the question is single but the answers are infinite.
(Illustration by Malay Karmakar / Mint)
The answers could be: technological progress (Robert Solowl), institutions (Douglass North), financial systems (Ross Levine), free markets (Friedrich Hayek), etc. Now, economists have added other factors as well: colonialism (Daron Acemoglu), legal origins (Andrei Shleifer), etc. A lot depends on who you pose the question to.
To an economist, seeking to identify the factors of growth is akin to the historian’s attempts to find the Holy Grail. Rodrik even wrote a paper with the same title. Just as historians differ on what is the Holy Grail, economists differ on the factors responsible for growth.
Economists have fired from all sides of the debate. But then there is China, which has had fast growth though it doesn’t satisfy most of the prerequisites that have been identified by the economists mentioned earlier.
It gets messier. There are papers that forecast how much a country can grow with available factors, only to realize that that economy has grown much faster! The best example is India, with growth above 9% surprising most forecasters. Then there is research that praises a particular economy for its growth model (South-East Asia and Latin America are prime examples), only to see it collapse after initial euphoria. Then there are certain countries whose models are usually criticized—India, for its caution; and China, for its excessive reliance on exports and public sector—but these economies continue to flourish.
Moreover, the policies that were once criticized tend to make an unexpected comeback—for example, export-led growth (see the work by Spence and El Erian) and and role of governments (Growth Commission). Avinash Dixit, in a lecture given at the World Bank conference, reviewed all the growth evidence and titled the paper very appropriately—Evaluating Recipes for Success. They are recipes, after all.
Then there are the battles over methodology. Rodrik writes in his blog: “Development economics is split between macro- and micro-development economists. The former focus on economic growth and tend to analyse economy-wide policies such as trade, fiscal, and currency policies... The latter focus on individual-level outcomes and analyse microfinance, education, health and other social policies.” Both approaches have their strengths and their weaknesses. Rodrik argues that reuniting the two approaches can help take development economics forward.
In sum, there are too many answers, loads of confusion and clamour over what works and what doesn’t. The search for the Holy Grail continues and one gets to see many reports/papers from the World Bank/IMF on a regular basis. The reports either review a particular factor (say, financial markets) or a region/country (say, Africa). Then there are ongoing seminars/conferences churning out more and more papers on the subject.
The World Bank reviewed its developmental efforts in a report (Economic Growth in the 1990s: Learning from a Decade of Reform). This report had many ideas that were similar to those in the Growth Commission report—the importance of macrostability, market forces and openness. As mentioned above, what we see are a few additions and subtractions, with some factors making dramatic comebacks.
So, what should we expect? We can only expect “The Search for the Holy Grail” to continue, and more research to follow. There is now an emerging consensus that each country is unique. Its development policies should be in sync with its own conditions and should not imitate those of the developed economies. Research will thus become more country-specific.
Development economics is still a very fertile subject and, despite wide-scale efforts, we still do not know much. It is much like the Dan Brown best-seller—The Da Vinci Code—where we have lots of clues and codes (the growth factors) to lead us to the Holy Grail (what leads to growth). We will surely need a Robert Langdon to put the entire story together. But let us first have the clues and codes together.
Amol Agrawal is an economist with IDBI Gilts Ltd. Comment at firstname.lastname@example.org