Growth accelerations and collapses

Highlights 1.Igniting growth requires a relatively narrow range of reforms, targeted at relaxing the “binding constraint” ◦Rapid growth is possible even in the midst of severe institutional or policy failings 2.Growth-promoting reforms often take unconventional or heterodox forms ◦Heterodox policies help overcome specific second-best complications or political constraints 3.Sustaining growth is different from igniting growth, and requires deeper institutional changes ◦Institutions of conflict management ◦Institutions to maintain productive dynamism

Every region has had a good decade

… even Africa High growth in Africa since the late 1990s as well. Will return to it.

Growth accelerations are very common

Growth accelerations occur everywhere Note: accelerations during the period from mid-1950s to early 1990s only.

Almost every country converges during some period (or diverges…) Source: Jones and Olken (2005)

How predictable are accelerations? Source: Hausmann, Pritchett, and Rodrik (2005), and Jong-A-Pin and de Haan (2008)

Types of changes in growth regimes

Growth collapses and decelerations

What causes growth collapses External shocks? ◦Terms of trade; sudden stops in capital flows ◦But magnitude of income decline too large to be explained by size of shock alone Magnified by macroeconomic mismanagement ◦Poor currency and fiscal policies ◦High inflation, hyper-inflation, debt traps Exacerbated by low quality of institutions of conflict management

A theory of growth collapses Proxies for latent social conflict: inequality (income and land) ethnic and linguistic differentiation social trust” Proxies for institutions of conflict management: civil liberties and political rights (democratic institutions) quality of governmental institutions rule of law bureaucratic efficiency and absence of corruption public spending on social safety nets

Determinants of post-1975 growth collapses Source: Rodrik (1999)

Africa’s recent growth acceleration: how sustainable is it? how would we know? Source: Arbache and Page (2009)

Concluding remarks Sustaining growth is hard, and requires ongoing institutional reforms Institutional prerequisites for sustaining growth are of two types in particular ◦Institutions of conflict management to maintain resilience to shocks and prevent growth collapses ◦democracy, “rule of law,” social insurance,.. ◦Institutions that maintain productive dynamism and prevent growth from fizzling out ◦Need for a framework of public policies that foster structural change So in the long-run, institutions do rule! ◦But don’t confuse what is required to instigate growth with what is required to sustain it