The Growth Report

A major new report has been released by the Commission on Growth and Development, which is composed of 2 Nobel laureates and 19 policymakers. The report refocuses development thinking on the question of how to achieve economic growth. Since many seem to have forgotten the need for growth to achieve development goals, this report is very welcome. The report identifies five common ingredients of high-growth economies over the long term:

1. They fully exploited the world economy
2. They maintained macroeconomic stability
3. They mustered high rates of saving and investment
4. They let markets allocate resources
5. They had committed, credible, and capable governments”

These are five very sensible points. It is, for instance, important to recognize as the report does that globalization is not the root cause of inequality within countries and that isolationism is a terrible developmental strategy. I am particularly interested in the 4^th and 5^th items—markets and governments—and the question of how to get the best out of both. I will argue that a democratic approach to the institutional development of markets and governments is a crucial, if not necessary consideration for sustainable, high growth.

Markets are the most efficient means for allocating resources, so they must feature prominently in any model of development. The Growth Report recognizes this and further that “mature markets rely on deep institutional underpinnings, institutions that define property rights, enforce contracts, convey prices, and bridge informational gaps between buyers and sellers.” Moreover, “an important part of development is precisely the creation of these institutionalized capabilities.” Bravo! This is what another Nobel laureate, Douglass North, has taught us.

Unfortunately, since predictive knowledge of how institutions shape markets and policies in developing markets is incomplete, the report abandons any effort to explore institutional development. The commission recommends instead that policymakers “cross the river by feeling for the stones,” an experimental approach to economic policy attributed to Deng Xiaoping. But if you believe that institutional development is key to long-term growth, I think that we must address this question, as difficult as it may be. Institutional development is a theme running through all of CIPE’s work, so I think there really are things that can be said about it!

I can’t say it all in a blog, so to get started you can take a look at what North has to say or read Hernando De Soto’s Mystery of Capital. De Soto and property rights are actually mentioned in the Growth Report, but what should be added to the report’s comments is that true property is a dynamic asset and a driver of innovation: “The Importance of Property Rights to Development.”

To be continued…