Profiling Daron Acemoglu's work

I came across this wonderful line in something I was reading:

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.

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 happen...it 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!!

Finance irrelevant for growth??

I really do not know where to begin. Should I focus on authors or on topics or on interesting academic papers or ???

Let me begin on my thoughts first. I have been reading a bit on what leads to development and growth in a country. It has traditionally been studied by people studying development economics (or dev eco as it is popularly called in campuses). It seeks answer to one question:

• What are the causes of growth? sustainabale growth?

This topic has always been at the centre of economic research. There are numerous ways economists have analysed growth and its factors. I would discuss the different factors in my next blogs.

What has been appalling to me most is that most of the works (read academic papers) in this field do not recognise the role of finance in development. The growth literature is quite old but none mention role of finance. Nobel Prize winner Merton Miller remarked "that financial markets contribute to economic growth is a proposition almost too obvious for serious discussion." Alternatively Nobel Laureate Robert Lucas (1988) holds that the role of finance in economic growthhas been "over-stressed" by the growth literature.

How can a country grow without having a good financial system? If it is growing (like China is), then the problems would simply blow up. The objective of the financial system is to allocate finance to the most productive activities in the economy. The better a financial system is at that purpose, the better are the growth prospects in any economy.

It is only recent works by Ross Levine, Raguram Rajan , Luis Zingales, etc. we have some papers, some thoughts on how finance leads to development. Most of the credit however goes to Levine for bringing tons of empirical work on the subject.

There is a lot of work since then and to keep updated of the papers so far, there is an excellent lietrature survey on the above by Levine. Also read the comments by Zingales on the survey. Excellent stuff!!