The Ideal Conditions for Growth and Development:
Rediscovering Old Truths
Given our extended discussion of economic growth, it seems appropriate to
conclude by asking the question, ‘what are the ideal conditions likely to
foster significant improvements in living standards?’ In order to generate the
‘ideal conditions’ for material progress, Landes (1998) has argued that the
lessons of history imply the following prerequisites:
1. an environment which fosters initiative, competition and emulation;
2. that job selection be based on merit, competence and performance;
3. financial rewards should relate to effort/enterprise;
4. the economy must be fully exposed to existing technological knowledge;
5. that education be widespread amongst the population.
These prerequisites in turn imply:
6. an absence of discrimination based on irrelevant criteria (race, religion,
gender);
7. an expressed preference for scientific rationality over ‘magic and superstition’.
The political and social institutions conducive to achieving these goals will
involve:
658 Modern macroeconomics
8. providing laws protecting the security of property, personal liberty and
secure rights of contract;
9. reducing rent-seeking behaviour;
10. providing for a more stable, moderate, honest, efficient and responsive
(democratic) government operating within a framework of publicly
known rules (Tanzi, 1999).
The importance of these preconditions for sustainable growth has been increasingly
recognized, although frequently deliberately ignored, since the publication
of Adam Smith’s Wealth of Nations in 1776. While no economy in the world
meets Landes’s ‘ideal’ conditions for material progress, it is obvious that some
come much closer to meeting the above criteria than others.
Along similar lines, Rodrik (2005) identifies certain desirable ‘meta principles’
that seem to apply across the globe regardless of history, geography and
stage of development. They include the importance of: incentives; security of
property rights; contract enforcement and the rule of law; the power of
competition; hard budget constraints; macroeconomic and financial stability
(low inflation, prudent regulation and fiscal sustainability); and targeted redistribution
that minimizes distortions to incentives.
To a large extent these ‘meta principles’ are ‘institution free’ in the sense
that they do not imply any fixed set of ideas about appropriate institutional
arrangements. In other words, there are many possible models of a mixed
economy and in practice the capitalist market-oriented economies that we
observe across the world exhibit a ‘diverse range of institutional arrangements’.
Every capitalist system consists of an amalgam of public and private
institutions and, as the ‘new comparative economics’ recognizes, European,
Japanese, East Asian and American forms of capitalism differ. However, as
Rodrik argues, in each case there are firmly in place ‘market-sustaining
institutions’ which he divides into four categories:
1. market-creating institutions (property rights and contract enforcement);
2. market-regulating institutions (regulatory authorities);
3. market-stabilizing institutions (monetary, fiscal and financial authorities);
4. market-legitimizing institutions ( democracy and social protection).
Given this framework, Rodrik concludes that there is ‘no unique correspondence
between the functions that good institutions perform and the form that
such institutions take’. There is plenty of room for ‘institutional diversity’
consistent with meeting the broad ‘meta principles’ (see Snowdon, 2002d).
On the basis of the above discussion many developing and transition economies
have a long way to go before they can hope to transform their economies
into systems that are capable of generating sustained improvements in living
standards. Without a significant change of direction what hope is there for the
citizens of countries such as North Korea? Thus while growth theory and
empirical research show that poor countries have enormous potential for
catch-up and convergence, these advantages will fail to generate positive
results on growth in countries with an inadequate political, legal and regulatory
framework. Research also indicates that economic growth does in general
benefit the poorest groups in society, so anyone who claims to care about the
poor should also favour ‘the growth-enhancing policies of good rule of law,
fiscal discipline, and openness to international trade’ (Dollar and Kraay,
2002b).
As we enter the new millennium liberal democracy is on the increase
across the nations of the world (Barro, 1997; World Bank, 1997). Whether
this ‘world-wide liberal revolution’ constitutes the ‘end point of mankind’s
ideological evolution’, as argued by Fukuyama (1989, 1992), is debatable.
Huntington (1996) offers a more pessimistic scenario with his controversial
argument that the twenty-first century will be characterized by ‘The Clash of
Civilisations’ based on cultural–religious divides! However, if the trend towards
increasing democratization continues, and the pessimistic predictions
of Huntington turn out to be wrong, the prospects for peace and ‘spreading
the wealth’ in the twenty-first century are greatly increased. Research indicates
that while democracies are just as likely to fight wars in general, and are
also more likely to prevail in conflicts with autocratic regimes, they are also
much less likely to wage war with one another. Compared to dictatorships,
democratic governments are more accountable to their electorates and have
better institutional means of conflict management and resolution (Lake, 1992;
Dixon, 1994). If the twenty-first century turns out to be more democratic and
peaceful than the twentieth century, then we can be much more optimistic
about the prospects for growth and poverty reduction across all the world’s
economies. As suggested by Minier (1998), a useful motto for the twentyfirst
century is ‘liberté, egalité, fraternité and prosperité’. In such a world
‘Convergence, Big Time’ is not impossible.
Rediscovering Old Truths
Given our extended discussion of economic growth, it seems appropriate to
conclude by asking the question, ‘what are the ideal conditions likely to
foster significant improvements in living standards?’ In order to generate the
‘ideal conditions’ for material progress, Landes (1998) has argued that the
lessons of history imply the following prerequisites:
1. an environment which fosters initiative, competition and emulation;
2. that job selection be based on merit, competence and performance;
3. financial rewards should relate to effort/enterprise;
4. the economy must be fully exposed to existing technological knowledge;
5. that education be widespread amongst the population.
These prerequisites in turn imply:
6. an absence of discrimination based on irrelevant criteria (race, religion,
gender);
7. an expressed preference for scientific rationality over ‘magic and superstition’.
The political and social institutions conducive to achieving these goals will
involve:
658 Modern macroeconomics
8. providing laws protecting the security of property, personal liberty and
secure rights of contract;
9. reducing rent-seeking behaviour;
10. providing for a more stable, moderate, honest, efficient and responsive
(democratic) government operating within a framework of publicly
known rules (Tanzi, 1999).
The importance of these preconditions for sustainable growth has been increasingly
recognized, although frequently deliberately ignored, since the publication
of Adam Smith’s Wealth of Nations in 1776. While no economy in the world
meets Landes’s ‘ideal’ conditions for material progress, it is obvious that some
come much closer to meeting the above criteria than others.
Along similar lines, Rodrik (2005) identifies certain desirable ‘meta principles’
that seem to apply across the globe regardless of history, geography and
stage of development. They include the importance of: incentives; security of
property rights; contract enforcement and the rule of law; the power of
competition; hard budget constraints; macroeconomic and financial stability
(low inflation, prudent regulation and fiscal sustainability); and targeted redistribution
that minimizes distortions to incentives.
To a large extent these ‘meta principles’ are ‘institution free’ in the sense
that they do not imply any fixed set of ideas about appropriate institutional
arrangements. In other words, there are many possible models of a mixed
economy and in practice the capitalist market-oriented economies that we
observe across the world exhibit a ‘diverse range of institutional arrangements’.
Every capitalist system consists of an amalgam of public and private
institutions and, as the ‘new comparative economics’ recognizes, European,
Japanese, East Asian and American forms of capitalism differ. However, as
Rodrik argues, in each case there are firmly in place ‘market-sustaining
institutions’ which he divides into four categories:
1. market-creating institutions (property rights and contract enforcement);
2. market-regulating institutions (regulatory authorities);
3. market-stabilizing institutions (monetary, fiscal and financial authorities);
4. market-legitimizing institutions ( democracy and social protection).
Given this framework, Rodrik concludes that there is ‘no unique correspondence
between the functions that good institutions perform and the form that
such institutions take’. There is plenty of room for ‘institutional diversity’
consistent with meeting the broad ‘meta principles’ (see Snowdon, 2002d).
On the basis of the above discussion many developing and transition economies
have a long way to go before they can hope to transform their economies
into systems that are capable of generating sustained improvements in living
standards. Without a significant change of direction what hope is there for the
citizens of countries such as North Korea? Thus while growth theory and
empirical research show that poor countries have enormous potential for
catch-up and convergence, these advantages will fail to generate positive
results on growth in countries with an inadequate political, legal and regulatory
framework. Research also indicates that economic growth does in general
benefit the poorest groups in society, so anyone who claims to care about the
poor should also favour ‘the growth-enhancing policies of good rule of law,
fiscal discipline, and openness to international trade’ (Dollar and Kraay,
2002b).
As we enter the new millennium liberal democracy is on the increase
across the nations of the world (Barro, 1997; World Bank, 1997). Whether
this ‘world-wide liberal revolution’ constitutes the ‘end point of mankind’s
ideological evolution’, as argued by Fukuyama (1989, 1992), is debatable.
Huntington (1996) offers a more pessimistic scenario with his controversial
argument that the twenty-first century will be characterized by ‘The Clash of
Civilisations’ based on cultural–religious divides! However, if the trend towards
increasing democratization continues, and the pessimistic predictions
of Huntington turn out to be wrong, the prospects for peace and ‘spreading
the wealth’ in the twenty-first century are greatly increased. Research indicates
that while democracies are just as likely to fight wars in general, and are
also more likely to prevail in conflicts with autocratic regimes, they are also
much less likely to wage war with one another. Compared to dictatorships,
democratic governments are more accountable to their electorates and have
better institutional means of conflict management and resolution (Lake, 1992;
Dixon, 1994). If the twenty-first century turns out to be more democratic and
peaceful than the twentieth century, then we can be much more optimistic
about the prospects for growth and poverty reduction across all the world’s
economies. As suggested by Minier (1998), a useful motto for the twentyfirst
century is ‘liberté, egalité, fraternité and prosperité’. In such a world
‘Convergence, Big Time’ is not impossible.
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