Friday, September 19, 2008


Some countries are rich, some are poor, and nobody really knows why. A popular explanation is institutional quality; some countries correctly structure law system/bureaucracy/regulations to ensure properly functioning economies. I think there's something to this, since clearly poor governments have poorly functioning economies while good governments tend to have awesome economies.

However, the basic idea has been taken too far, perhaps most extremely in the Washinton Consensus. As this Economist article shows, poorer countries tend to have a higher cost of firing workers, but differences in position don't seem to be great in explaining per capita growth or income. The BRICs have relatively poor governance, as does Germany. Yet the BRICs also have great growth, even relative to other poor countries. In Rodik terms, large income differences between countries imply high expected growth rates through convergence, which are occasionally realized when countries remove binding constraints. That is, poor countries have a lot of potential, which can be tapped not through a wholescale upgrading institutions on social democratic lines (though that is good), but through eliminating context-specific roadblocks.

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