Dani Rodrik on growth, institutions and structural change
Dani Rodrik has a new paper on “The Past, Present, and Future of Economic Growth.”
Rodrik distinguishes between growth that is a function of “fundamental capabilities” (human capital and institutions) and growth from “structural transformation” (the move to higher-productivity industries). He argues that periods of extraordinarily high growth are the result of structural transformations. Increases in fundamental capabilities exhibit important complementarities, but they are slower in developing.
What are the implications for political change? Rodrik’s other great work in this area merits future posts. For now, let’s look at just one question: How much must existing, poorly functioning institutions improve before economic conditions are likely to improve?
In a sense, Rodrik’s take seems pessimistic: The world is full of poorly functioning institutions, and improvement is sporadic. Yet there is reason for optimism, as the author describes in a recent blogpost on his paper:
The policies needed to accumulate fundamental capabilities and those required to foster structural change naturally overlap, but they are distinct. The first types of policies entail a much broader range of investments in skills, education, administrative capacity, and governance; the second can take the form of narrower, targeted remedies. Without some semblance of macroeconomic stability and property rights protection, new industries cannot emerge. But a country does not need to attain Sweden’s level of institutional quality in order to be able to compete with Swedish producers on world markets in many manufactures.
This does not mean that reformers need not worry about improving institutions, only that real gains may be had with some highly imperfect ones, under certain conditions. Ultimately, sustained growth still requires well-functioning institutions.