Saturday, March 7, 2009

The role of institutions in growth

Chris Blattman suggested reading Dani Rodrik's paper Goodbye Washington Consensus, Hello Washington Confusion?, so I did. It's an interesting read.

I appreciate his view that institutions are important for development, but not the end all. He gives two reasons for this point: First, "the cross-national literature has been unable to establish a strong causal link between any particular design feature of institutions and economic growth" and, more telling,
We should not forget that Acemoglu et al.’s (2001) work and other related research focused on long-term economic performance. The typical dependent variable in this line of literature is the level of income in some recent year, not the rate of economic growth over a particular period. When institutional indicators are introduced in growth regressions, the results are much weaker and less robust.
These two points lead to what I think is great advice to development economists:
A policy maker interested in igniting economic growth may be better served by targeting the most binding constraints on economic growth—where the bang for the reform buck is greatest—than by investing scarce political and administrative capital on ambitious institutional reforms.

No comments: