Growth and Development Notes 20

We now look at the case of currently converging countries and what

their future may be like.
We then look at countries that are not currently converging and look at
ways we can promote development and growth.
Finally, we look at whether growth and development will continue at
the frontier and thus the leading countries such as USA and UK.
The view on currently converging BRIC countries in terms of
luck
Both Brazil and China in recent years been growing very fast. Both
countries have made an exit from the traditional sector which is
agriculture and moved into the modern sector which is industry.
But these countries have only started converging recently. This means
one of the four fundamental factors of growth must have changed in
recent years to have promoted and caused this growth and
convergence. It is very unlikely, that in such a short period of time,
permanent features like culture or geography could have changed. This
leaves luck and institutions.
If growth in Brazil and China was due to luck, then it could have been
the case that they both began to pick better leaders by luck and thus
good political and good economic institutions were implemented,
which then encouraged people to invest and innovate. Or it could have
been the case where investors were able to get out of the bad Nash
equilibrium, where they were unable to coordinate, to a good
equilibrium in which they all started to innovate.
If the explanation for the emergence of growth in Brazil and China is
change in leadership, then it may be quite hard for us to make
predictions on the future. Thats because future growth will depend on
future policies, which in turn will depend on the quality of future
leaders. And since we dont yet have a theory of how luck determine
the quality of leaders, there is very little we can say. If instead the
explanation is that these countries have switched to a good
equilibrium, we may certainly hope that they will remain in the new
equilibrium for the foreseeable future, and that they will therefore
continue to growth. Since equilibria may be easily perturbed by

government policies, however, there is, again, a considerable degree of

uncertainty.
The view on currently converging BRIC countries in terms of
institutions
Supporters of the institution argument say that the reason Brazil and
China have only recently started growing and converging is because of
changes in institutions. In the case of Brazil, Acemoglu and Robinsons
believe that the emergence of sustained economic growth was largely
due to the Workers success in establishing more good political
institutions in the 1980s and 1990s. These better political institutions
delivered a large reduction in inequality and a much improved access
to education, making it more feasible for people to innovate and
invest. Thus in Acemoglu and Robinsons view, Brazils growth is very
promising because it is based on the establishment of good political
institutions.
In the case of china, Acemoglu and Robinsons say that their growth is
based on the establishment of good economic institutions. The
introduction of these institutions lead to markets becoming more
contestable and to the abolishment of restrictions on private property,
market transaction and economic initiative. At the same time, fourteen
cities were given open city status, this meant that they could now
attract foreign direct investments. Because of these reforms, private
entrepreneurs have been able to operate in China which has lead to
investment and capital accumulation. Also China benefits from a large
supply of cheap domestic labour, and they see a massive inflow of
foreign technology and capital which gives people the incentive to
accumulate capital and adopt foreign technology.
However, Acemoglu and Robinsons say that Chinas growth may not be
sustainable in the long run. This is because their establishment of good
economic institutions came from the persistence of bad economic
institutions not because of good political institutions. In China, power
still remains in the hands of the elite party. This means that public
companies must follow the orders of the elite, and private companies
are at a disadvantage in competing with public companies, private
companies can only enter the markets with the support of the elites,
property rights are still often violated. All of this means that in the long
run if a new company that is better at accumulating capital or
innovating than an old company, wants to enter the market and

replace that old company it may not be possible because the new
company may be a private company whereas the old company may be
a public company with connections to the elite. This means in the long
run, capital accumulation or technological progress cannot occur in
China and thus they will not be able to grow in the long run.
In AR (2012)s view, current growth in China is driven by rapid
accumulation of capital (K and H ), particularly thanks to improved
access to markets, inflow of foreign technology, and cheap labor.
Future growth, however, will have to be driven by domestic innovation
as well
(A ), and this is unlikely to pick up unless creative destruction is
allowed - unless every company 2 is allowed to create, by destroying
the position of company 1. The key point is that, according to AR
(2012), persisting bad political institutions - a strong and
unaccountable party elite - will be unlikely to allow for that, and this
may end up putting a break on growth.
The bottom line is that, in the institutional view, continuation of growth
in China will require the introduction of more pluralistic political
institutions. Since it is hard to believe that party elite will introduce
such institutions if not forced to, what will really be needed will be for
the Chinese people to ask the introduction of more pluralistic
institutions (these may well be different from Western-style
democracies). AR (2012) have a similar view of other currently fastgrowing economies, e.g. Cambodia, Vietnam, Burundi, Ethiopia,
Rwanda.
In passing, we notice that, implicitly, what AR (2012) are suggesting is
that luck is the explanation for Chinas success - its current economic
growth resting on the introduction of good economic institutions, which
was possible not because of a structural improvement in political
institutions, but because of the fortuitous ascent to power of a series of
illuminated party leaders from 1979 onwards.
How to promote growth in countries that are not converging?
How can institutions such as the World Bank and IMF alongside other
bilateral donors and NGOs help countries to grow and exit poverty?
In general, help from these institutions have been targeted to help
poor performing countries adopt and implement good economic
institutions so that people can accumulate physical and human capital

and innovate and thus allow them to grow. So it can be said that they
have taken an institution view on why countries do not grow. However,
it has done so under an implicit assumption: that local policy makers
would be happy to introduce good economic institutions and policies It assumes that they just dont exactly know what they are doing or
dont have the money to implement them and thus have picked a bad
leader. Thus, development assistance has also implicitly adopted the
luck (or ignorance) hypothesis for why nations fail: give countries
good advice on how to improve economic institutions, give them the
money they need to do it, and growth will follow.
People who believe in tropical underdevelopment tend to accept this
approach, but also insist that countries at the tropics need a special
type of assistance. For example, they need policies specifically
designed to improve health conditions and soil quality. In general,
supporters of the tropical underdevelopment theory advocate a more
integrated approach to economic development and the ecology (see
Sachs, 2001).
Supporters of the institution argument say that help and aid will do
very little in terms of helping these countries develop and grow. This is
because they believe that policy makers and leaders in these poorly
performing countries already know what is needed for a country to
grow but they just dont want to implement it because of fears that it
may cause them to lose power.
Will growth continue at the frontier?
Countries like USA, have reached their steady state level of capital per
efficiency unit of labor and is thus only growing due to technological
progress. The question is, will technological progress slowdown and
eventually disappear?
Some say that how can this be likely with all new inventions that have
come out in recent years such as smartphone and the internet etc.
But others argue that technological progress in the last few decades
have been incremental (small). They say this because technological
progress in the last few decades has consisted of merely improving
past inventions rather than inventing new things completely. And
secondly people argue that inventions today are not as valuable as
inventions in the past. This can be demonstrated very easily by asking

someone would you rather give up running water in your home or give
up Facebook.
This suggests that technological progress is slowing down and thus
growth at the frontier may too slowdown and eventually disappear.
Moreover, since the financial crisis, growth has been slower than
previously expected. This is because there is a lack of savings and very
little investment. In the Solow Model, all savings are channeled into
new investments. Could this suggest that investors do not invest
because there is less innovations around? If that is the case, then
technological progress is slowing down. Nonetheless, the answer to
whether growth will continue at the frontier cannot be answered.