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11.22 The Ideal Conditions for Growth and Development: Rediscovering Old Truths

Given our extended discussion of economic growth, it seems appropriate to

conclude by asking the question, ‘what are the ideal conditions likely to

foster significant improvements in living standards?’ In order to generate the

‘ideal conditions’ for material progress, Landes (1998) has argued that the

lessons of history imply the following prerequisites:

1. an environment which fosters initiative, competition and emulation;

2. that job selection be based on merit, competence and performance;

3. financial rewards should relate to effort/enterprise;

4. the economy must be fully exposed to existing technological knowledge;

5. that education be widespread amongst the population.

These prerequisites in turn imply:

6. an absence of discrimination based on irrelevant criteria (race, religion,

gender);

7. an expressed preference for scientific rationality over ‘magic and superstition’.

The political and social institutions conducive to achieving these goals will

involve:

8. providing laws protecting the security of property, personal liberty and

secure rights of contract;

9. reducing rent-seeking behaviour;

10. providing for a more stable, moderate, honest, efficient and responsive

(democratic) government operating within a framework of publicly

known rules (Tanzi, 1999).

The importance of these preconditions for sustainable growth has been increasingly

recognized, although frequently deliberately ignored, since the publication

of Adam Smith’s Wealth of Nations in 1776. While no economy in the world

meets Landes’s ‘ideal’ conditions for material progress, it is obvious that some

come much closer to meeting the above criteria than others.

Along similar lines, Rodrik (2005) identifies certain desirable ‘meta principles’

that seem to apply across the globe regardless of history, geography and

stage of development. They include the importance of: incentives; security of

property rights; contract enforcement and the rule of law; the power of

competition; hard budget constraints; macroeconomic and financial stability

(low inflation, prudent regulation and fiscal sustainability); and targeted redistribution

that minimizes distortions to incentives.

To a large extent these ‘meta principles’ are ‘institution free’ in the sense

that they do not imply any fixed set of ideas about appropriate institutional

arrangements. In other words, there are many possible models of a mixed

economy and in practice the capitalist market-oriented economies that we

observe across the world exhibit a ‘diverse range of institutional arrangements’.

Every capitalist system consists of an amalgam of public and private

institutions and, as the ‘new comparative economics’ recognizes, European,

Japanese, East Asian and American forms of capitalism differ. However, as

Rodrik argues, in each case there are firmly in place ‘market-sustaining

institutions’ which he divides into four categories:

1. market-creating institutions (property rights and contract enforcement);

2. market-regulating institutions (regulatory authorities);

3. market-stabilizing institutions (monetary, fiscal and financial authorities);

4. market-legitimizing institutions ( democracy and social protection).

Given this framework, Rodrik concludes that there is ‘no unique correspondence

between the functions that good institutions perform and the form that

such institutions take’. There is plenty of room for ‘institutional diversity’

consistent with meeting the broad ‘meta principles’ (see Snowdon, 2002d).

On the basis of the above discussion many developing and transition economies

have a long way to go before they can hope to transform their economies

into systems that are capable of generating sustained improvements in living

standards. Without a significant change of direction what hope is there for the

citizens of countries such as North Korea? Thus while growth theory and

empirical research show that poor countries have enormous potential for

catch-up and convergence, these advantages will fail to generate positive

results on growth in countries with an inadequate political, legal and regulatory

framework. Research also indicates that economic growth does in general

benefit the poorest groups in society, so anyone who claims to care about the

poor should also favour ‘the growth-enhancing policies of good rule of law,

fiscal discipline, and openness to international trade’ (Dollar and Kraay,

2002b).

As we enter the new millennium liberal democracy is on the increase

across the nations of the world (Barro, 1997; World Bank, 1997). Whether

this ‘world-wide liberal revolution’ constitutes the ‘end point of mankind’s

ideological evolution’, as argued by Fukuyama (1989, 1992), is debatable.

Huntington (1996) offers a more pessimistic scenario with his controversial

argument that the twenty-first century will be characterized by ‘The Clash of

Civilisations’ based on cultural–religious divides! However, if the trend towards

increasing democratization continues, and the pessimistic predictions

of Huntington turn out to be wrong, the prospects for peace and ‘spreading

the wealth’ in the twenty-first century are greatly increased. Research indicates

that while democracies are just as likely to fight wars in general, and are

also more likely to prevail in conflicts with autocratic regimes, they are also

much less likely to wage war with one another. Compared to dictatorships,

democratic governments are more accountable to their electorates and have

better institutional means of conflict management and resolution (Lake, 1992;

Dixon, 1994). If the twenty-first century turns out to be more democratic and

peaceful than the twentieth century, then we can be much more optimistic

about the prospects for growth and poverty reduction across all the world’s

economies. As suggested by Minier (1998), a useful motto for the twentyfirst

century is ‘liberté, egalité, fraternité and prosperité’. In such a world

‘Convergence, Big Time’ is not impossible.

Robert Solow was born in 1924 in Brooklyn, New York and obtained his BA,

MA and PhD from Harvard University in 1947, 1949 and 1951 respectively.

He began his academic career as an Assistant Professor of Statistics (1950–

54) at the Massachusetts Institute of Technology (MIT), before becoming

Assistant Professor of Economics (1954–8), Professor of Economics (1958–

73) and Institute Professor of Economics (1973–95) at MIT. Since 1995 he

has been Institute Professor Emeritus of Economics at MIT.

Professor Solow is best known for his seminal work on growth theory and

capital theory, and for his development and championing of neo-Keynesian

economics. In 1987 he was awarded the Nobel Memorial Prize in Economics

‘for his contributions to the theory of economic growth’. Among his bestknown

books are: Linear Programming and Economic Analysis (McGraw-Hill,

1958), co-authored with Robert Dorfman and Paul Samuelson; Capital Theory

and the Rate of Return (North-Holland, 1963); Inflation, Unemployment and

Monetary Policy (MIT Press, 1998), co-authored with John Taylor; and Growth

Theory: An Exposition (2nd edn, Oxford University Press, 2000). His most

widely read articles include: ‘A Contribution to the Theory of Economic

Growth’, Quarterly Journal of Economics (1956); ‘Technical Change and the

Aggregate Production Function’, Review of Economics and Statistics (1957);

‘Analytical Aspects of Anti-Inflation Policy’, American Economic Review

(1960), co-authored with Paul Samuelson; ‘Does Fiscal Policy Matter?’ Jour-