The current literature on empirical development economics contains a vigorous debate as regards the variety of approaches to understanding the development paradigm. Economic and regulatory policies, human and physical resources, and governance are all seen as drivers of economic development and yet there is no agreement on the exact roles each play in driving development. The fundamental puzzle retains two questions: Do the quality of one of these factors matter more for sustained economic growth and development? Is it the case that their relative importance is homogenous across countries and stages of development?
One strand of development economics contends that a combination of a stable macro-economy with market and investment climate-friendly set of economic policies is the necessary and sucient condition for economic growth, which then drives other concepts of development, such as living standards and health outcomes. This view is associated with the Washington Consensus, which was the dominant paradigm of the 1980s and 1990s. It is under this consensus that multilateral lending agencies advised successive developing country governments on the need to fix budgets, cut inflation, and watch the economy take off with the dynamism of its private businesses. The experience of various countries, especially in Latin America that followed structural reforms to heart and yet ended up with sub-par growth performance in the 1990s however was a crude blow to this approach. This prompted even the World Bank, one of the proponents of the Washington Consensus to focus beyond stable macro-economic conditions and business-friendly reforms, as it did on its report on the growth experience of the 1990s.
A rival strand, which goes back to Gerschenkron’s theories on backwardness, believes in the context-specific and more subtle nature of development. Recent proponents contend that institutions matter, and well-governed countries are likely to grow faster, be more effective in alleviating poverty, and are also likely to be more successful in creating equitable growth and redistribution. A radical strand of this approach is one taken by Rodrik, Hausmann and Velasco,
as the authors deviate significantly from a model of growth that specifies a nature of homogeneity in reforms to catalyze growth. Their growth diagnostics approach attempts to identity binding constraints, which are notions of the most important areas where reforms can bring the largest and quickest benefits. In this framework, improving trade barriers can either strongly accelerate the growth process; or have no impact on growth trends at all, depending on the need of the economy at the hour. The binding constraint of an economy hence dictates how successful particular reforms are.
Empirical work on development macroeconomics has not been able to converge on one strand or another. Initial theoretical and empirical work into growth accounting delivered results that both trends in total factor productivity and capital accumulation (physical and human) have significant roles in driving growth, while productivity trends appear to be more important. These results however move us no further in the above questions, because various economic policies, governance efficiency and institutional quality all affect trends in productivity and capital accumulation. Without a strong macro-economic environment, it is hard to create significant private investment. Rampant corruption mostly goes along with weak incentives for firms to compete
and hence to lower productivity growth. We can think of numerous other examples, but the point remains; the question of relative impact of reforms in one dimension against another is still very much left unanswered.
A large part of the problem is the inability of empirical macro-research to converge on methods and techniques that can attribute causal effects of interventions on outcomes. Traditionally, OLS regression methods have been used on country cross-section data to study the links between macro policy/governance interventions and outcome variables. These methods have been criticized for the lack of accuracy emanating from problems of omitted variable bias and endogeneity, model uncertainty and heterogeneity. Researchers have attempted to solve some of these problems by using instrumental variables approach, for example Acemoglu et al. (2001).
These studies are important steps towards estimating causal inference in cross-country studies and yet problems remain. Strong external instruments are hard to find, and even if they exist, the effect obtained from such regressions are limited to the variation that is affected by the instrument. These problems make the instrumental variables approach limited in its ability to evaluate macro interventions. This has led some researchers to use dynamic panel data methods,
which account for endogeneity issues and yet other problems remain, such as the instability of results from cross-country regressions when variables, time periods and countries in the data change.
Our goal in this paper is not to attempt to resolve the two aforementioned questions in their entirety. Such an endeavor requires a much larger and longer research agenda. We merely attempt to identify specific cases of reforms in the disparate dimensions, ranging from macroeconomic anddebt dynamics to governance reforms in the last decade, and attempt to assess their impact on development indicators such as economic growth. We do this by using recently developed methods of inference, which help us attribute with larger certainty the impact on outcome variables to the interventions themselves. By selecting case studies where changes in one dimension were not accompanied by changes in other dimensions, the paper provides a window of understanding into whether reforms in certain dimensions affected development outcomes by themselves or not.
We also perform robustness checks to see whether the results of these methods are sensitive to minor modeling changes. We believe that by building a larger catalogue of such results, we can attempt to start understanding the questions highlighted above. In order to complete this task, we need to first identify significant large scale interventions in policy and governance dimensions. Chapter II of the paper explains our methodology on how to identify and measure large recent interventions on policy and governance dimensions. Chapter III explains the methodology we use to understand how successful these interventions have been in contributing towards developm
World Bank.Author: Dhungana, Sandesh.Document Date: 2011/12/01.Document Type: Policy Research Working Paper.Report Number: WPS5918
