Monday, April 23, 2007

More on growth and development

Just to carry on with the Friday discussion on growth and development, this weekend I read a bit more on development. The more I read on this topic the more I am amazed by the available literature. As I mentioned all kinds of factors have been discussed and widely researched and written (of which I have become aware recently, phew!!).

I read this paper by Rajan and Zingales where the central idea is that underdevelopment is due to initial factor endowments in the country. Their work is different from the earlier works that have looked at institutions, geography, religion, culture etc as factors for growth. Paper by R & Z offers more hope in the sense that where others look at factors which cannot be altered ( for instance what can a country do if it has adverse climatic conditions or has a difficult geographical landscape... ) or are difficult to alter (changing institutions its own time etc), R &Z explain factors that are more endogenous and hence can be altered.... the path to development is still a difficult one but there is more hope than offered by other papers.

By factor endowments they mean is that interests of certain groups (they call it constituencies) may not be aligned with each other and hence may oppose the reforms. The paper has some very interesting insights and has developed a very useful model which helps us understand if reforms are the key why don't they is understood that in dictatorship reforms may not be allowed why is it that democracies fail to implement reforms (India is a classic case). So to get out of the trap, we need proper sequencing of reforms. The traditional advice "fix the institutions" may not work as what is needed is to make the endowments more equitable for reforms to take place.

The paper however is disappointing in one aspect... it doesn't dwell in details how can endowments be changed? They attribute it to economic and non-economic factors which to me again look like fate more than anything else. They talk of non-economic factors like religion, nationalist movements etc. which have altered the initial factor endowments in countries. There are rich examples but still the problem persists.

But an interesting paper by all means. Another great stuff by this deadly combo!!

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