Institutional Dimension of Growth Theories and the Resulting Policy Implications - Essay Example

Causality issues in the al Dimension of Growth Theories and the resulting Policy Implications. Gleaser, E., et al. (2004), “”Do s Cause Growth?”. Journal of Economic Growth 9, 271-303. Hall, R. E. and Jones, C. I. (1999), "Why Do Some Countries Produce So Much More Output per Worker than Others?". Quarterly Journal of Economics, 83-116. Rodrik, D., et al (2004), “Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development”. Journal of Economic Growth 9, 131-165. Summary All three articles contribute to growth theory in that they try to assess the importance of institutions to the growth dynamics of a country. Hall and Jones investigate the question of why some countries are more productive than others by looking at the causes of different rates of accumulation of human and physical capital across countries. Particularly, their research tries to identify the reasons why resources are diverted away from capital accumulation, as this diversion lead some countries to invest less in education and physical capital, resulting in lower growth rates. This diversion away from growth promoting investment takes the form of thievery, unprotected property rights The investigation is based around a hypothesis that these differences in investment in capital accumulation is primarily the result of differences in social infrastructure across countries. Social infrastructure, as a concept used in their research, includes a number of ideas such as institutions and government policies, all of which, they claim, contribute to creating an environment in which capital accumulation is encouraged. A social infrastructure favourable to high levels of output per worker provides an environment that supports productive activities and encourages capital accumulation, skill acquisition, invention, and technology transfer. The researchers claim that creation of this favourable social infrastructure is best done by the government because they have the authority to collect the resources needed to establish the regulations and laws that would create a framework to stop diversion. However, corrupted government, engaging in rent-seeking behaviour, contribute to the diversion of resources away from activities of capital accumulation by creating poor contracts, interfering in production activities, and impeding trade. As such, the paper does indicate that the most appropriate social infrastructure for growth would limit the role of government given government’s propensity for rent-seeking behaviour. A major issue that is developed in their research concerns the direction of causality between social infrastructure and output per worker. Hall and Jones admit that more productive workers, with higher levels of education and income levels, could influence the social infrastructure. As such, countries experiencing low growth levels are unable to provide the resources necessary to create a supportive social infrastructure that would encourage further human and physical capital accumulation, meaning that appropriate social infrastructure could only be developed after a certain threshold of capital accumulation has been achieved. The authors interestingly control for this feedback by using the geographical and linguistic characteristics of an economy, which provide an indication of the extent to which the economy is influenced by western Europe, as instrumental variables. Establishing western European society as a baseline for comparison is done by the authors because they believe that this society was the first region of the world to implement broadly a social infrastructure favourable to production as it was Western Europe that discovered the ideas of Adam Smith, the importance of property rights, and the system of checks and balances in government, and the countries that were strongly influenced by Western Europe were, other things equal, more likely to adopt favourable infrastructure.. However, I do not think this resolved the causality issue in question because it does not disassociate the western European social infrastructure from the characteristics of the Western Europeans. The question still remains why this social infrastructure would be independent of the level of human capital of the migrants. The research presented by Rodrik et al also supports Hall and Jones’ theory of the importance of institutions in determining domestic growth. They note that the literature identifies a number of causes of differences in growth and income across countries which look at geography and the impact of climate, natural endowments on productivity; the role of international trade and market integration; and the role of institutions in ensuring property rights and the rule of law. These concepts, they argue are used to explain why some countries accumulate capital and implement technological change faster than other and provide ‘deeper’ thinking on growth. However, these are not independent variables for example the level of integration and the quality of the institutions are endogenous, dependent on each other as well as on income levels, which raises the issue of reverse causality. Institutions however have a positive and significant effect on integration and whilst geography only has a weak effect on incomes but a strong effect on institutions and hence heir research finds that the quality of institutions trump everything else. Theie research departs from that presented in the Hall and Jones paper in that it contends that whilst there are substantial economic gains from improving institutions, there is however a difference between institutions and policy. Hence the concept of social infrastructure which Hall and Jones use to represent the government supported framework for economic activity is divided into Institutions and Policy. They argue this is because institutions develop over time and are the outcome of past as well as present policy. Thus the practical applicability of their research is that it is that is difficult to implement policy that would immediately create institutions to support growth, and that growth promoting institutions are context specific. The practical use of their research is somewhat ambiguous. On the one hand, their results indicate that government institutional framework is of primary importance to the growth strategy of the country, on the other hand, this institutional framework cannot be copied from elsewhere to produce the same results, nor can it be immediately created. It is therefore difficult to see how any practitioner can change policy based on this research. Gleaser et al contradict the importance of institutions in their research which also looks at the relationship between institutions, human capital and growth. They distinguish between the work of institutionalists who not only ascribe primary importance of institutional framework to growth but also support democratic institutions, as the least rent-seeking of all government forms and the least intrusive in production, as the best form of government to support growth, from those developmental theorist who argue that growth and human capital accumulation lead to institutional improvement. The main difference between these two economic theories which both value the role of the rule of law to support investment in human and physical capital and is whether government policy promoting the rule of law should be the result of limiting government’s role, and promoting democracy, or whether government can choose to implement a framework to support growth policy, this choice being one of many belonging to an opportunities bundle that is determined by the level of physical and human capital in society. Their research shows that government’s choice of the quality of institutional frameworks rises as incomes rise and use the South Korean example to illustrate. They argue that between 1950 and 1980, the South Korean dictatorship chose to implement capitalist systems. The growth achieved was much higher than its North Korean neighbour which implemented socialist policies under its dictatorship. They then argue that it is this initial growth and the capital accumulated in this period, rather than a transformation to democracy in 1980, that was the main factor accounting for South Korea’s growth between 1980 and 2000. They argue that econometrics analysis of Institutions and growth use Instruments to represent Institutions which are highly correlated with human capital accumulation. (words = 1197). Read More