More questions for ‘Stickman’ economists

One of BigCake’s tired old questions: How come New Zealand has some of the best indicators of strong economic growth in the world (tops for protecting investors and lack of protectionism, 2nd ease of doing business, 3rd economic freedom) yet our results are so bad?

Following up on yesterday’s post about economists’ “stickman” view of the world, Harvard economist  Dani Rodrik has helped make sense of this.

In an introduction to his book In Search of Prosperity, he starts off with more questions that challenge “stickman” economic orthodoxy.

• How has China managed to grow so rapidly despite the absence of fully edged private property rights?
• How did Indonesia manage to grow over a 30-year period despite weak institutions and highly distorted microeconomic policies?
• Why do the Philippines and Bolivia continue to stagnate despite a sharp improvement in their “fundamentals” since the 1980s?

The usual answer to BigCake’s question is that we haven’t gone far enough with the reforms of the 1980s and 90s and some of the best bits were eaten away during the last decade.

There are elements of truth to this, but the answer goes nowhere near explaining where we are now, and how we got here.

Rodrik tracks the problem back to the standard economic thinking.

He says the usual approach of economists when looking at a nation’s income levels is to look at :
• Resource endowments/accumulation (eg. labour, physical capital, human capital)
• Productivity (how these endowments are deployed).

He says you have to be careful interpreting this information because they are all tied up in each other (in geek speak endogenous).

I’m paraphrasing again here (so apologies to the prof. if I’ve got this wrong).

This, Rodrik says prevents us making meaningful interpretations of any isolated part of the growth equation.

“For example, observing that 80 percent of the growth is ‘accounted’ for by accumulation and the rest by productivity does not tell us that growth would have been necessarily 80 percent as high in the absence of technological change; perhaps in the absence of productivity change, the incentive to accumulate would have been much lower and the resulting capital deepening significantly less.”

“Indeed …the causality may well run backwards, from growth to accumulation and productivity instead of the other way around.”

So, he says it is best to think of accumulation and productivity change as close determinants of growth at best.

I’ll post soon on what Rodrik says are the things we should be looking at.