To paraphrase Robert Lucas (1988), once one starts to think about economic growth, it is hard to think of anything else.
I can't agree more with this sentence. It sums up my state of mind in recent months. Initially, I used to understand this field as run of the mill types with little to offer only to realise how wrong I was. I continue to be amazed by the work done so far in the subject and the approaches taken by economists to arrive at their own set of conclusions.
As I am still new to this subject (which is a case with most of the subjects) I would like to take up the papers one by one. I have covered a paper by Rajan/Zingales which attributes low underdevelopment to the initial factor endowments in a country. Their idea is very different in the sense that even if you create reforms, development may not happen if the initial factor endowments are not distributed equally.
Recently, I have begun to read growth and development work by Daron Acemoglu. Another Clark Medal Winner (Here is Levitt congratulating Acemoglu) and has done some remarkable work on the same. There is a very good overview of his work by Robert Shimer whose name I picked from Freakonomics Blog. Levitt says he could have been one of the leading contenders for the Clark Medal. That got me to searching Shimer's work and I discovered this gem of a paper summarizing all of Acemoglu's work so far. Here is the paper. Considering the fact that Shimer has coauthored some work with Acemoglu, it again emphasises the importance of having a thinking partner.
His other work looks equally good but it his work on institutions and development, Investment and Growth and on Political Economy which has impressed me the most. I have been aware of his work on first of the three but to read the other two has been simply an eye-opener.
The question which often comes to mind is even US was a colony and so was Africa. Why and How did the two have such different levels of development? For how, there have been many factors - human capital formation, initial factor endowments, geography, education, institutions etc. Out of so many, institutions have been attributed as the most important cause for growth. And this is Acemoglu's view as well.
However, it is the answer to why that he has made a more valuable contribution to our understanding of growth theory. To cut the story short, in his landmark paper he attributes underdevelopment due to mortality rates in erstwhile colonies. Whichever colonies had higher mortality rates (due to malaria etc) the colonizers set up extractive institutions and wherever it was low, they set up good/efficient institutions. As the mortality rates were high in Africa, hence poor institutions and hence low development.
In another paper he shows that colonizers set up extractive poor institutions where the colonies were already rich & prosperous and efficient institutions where colonies were poor. Hence, India which was a rich country continues to be poor.
Well, again the basic idea is same that institutions are important. It is the approach towards understanding why certain countries grew and others didn't. There have been criticisms on the paper and there would continue to be more, but it is the basic freshness of the research which I feel is important.
But again, like other papers what is the hope for Africa and other poor countries. How do they change the institutions which have been set so many years back. How does somebody change the history? This is one aspect most economists agree is the most difficult part and continues to be a challenge for research.
I would continue to post on this fascinating subject. Keep visiting this blog.