Prescriptions for Economic Growth

There are a lot of theories (and thus, prescriptions) on what leads to a country’s economic prosperity. In Missing in Action, Pranay Kotasthane evaluates the most popular of such theories.

 

Economic freedom: This consists of open markets and less government in economic matters, labour reforms, low tax rates, and ease of doing business. This certainly describes the West. And since the West funds international organizations, the IMF and World Bank push for such policies when they give aid. But there are too many exceptions to this policy – South Korea and Taiwan became rich by focussing on exports while making it hard for foreigners to sell; and the South Korean banking system was largely government owned. Many countries that have followed these prescriptions have failed, from Argentina to Greece to South East Asia at different points.

 

Political freedom and institutions: This refers to individual rights, property rights, and judicial effectiveness. That certainly is how the West is. Today. But the West became rich by colonialism, exploitation, slavery, and paying lower wages to women. They switched to all of these attributes after they became rich. So is it possible these attributes apply only after reaching a minimum threshold of prosperity? Besides, the cases of authoritarian regimes that transformed their country’s economic prosperity extends from South Korea to Singapore to China.

 

Geography: It refers to the climate and resources in a place. This one, if true, is depressing because it implies a foregone conclusion, a factor beyond one’s control. But so many countries with similar geographies ended up so vastly different economically. And the locations of the great civilizations of older times doesn’t overlap with the richest countries of present day.

 

Investment in physical infrastructure and human capital: This one is hard to prove or disprove. Because the time period over which such investments are made and yield results is very long. A lot of other variables and events are part of the equation over such long periods.

“There is a lot of fog and a lot of retrofitting of evidence.”

 

Kotasthane ends by clarifying that he isn’t saying all of the above are wrong. Rather, he is saying none is a foolproof recipe for economic growth. Each may have some elements of truth, but context and luck matter too. His point is to keep an open mind, iterate, and course correct as needed, not get married to a methodology. And yes, all of the above theories do make it clear that certain variables are definitely harmful to economic growth – like weak rule of law, poor accountability and entrenched corruption.