Abstract

The new growth literature, using both endogenous growth and neoclassical models, has generated strong claims for the effect of national policies on economic growth. Empir­ical work on policies and growth has tended to confirm these claims.

Keywords

economic growth, macroeconomic policies, international trade, economic reform, economic development

JEL classification: O1, O4, E6, F4

An influential study by World Bank researchers Paul Collier and David Dollar (2001) finds that policy reform in developing countries would accelerate their growth and cut world poverty rates in half. They conclude that

Poverty reduction - in the world or in a particular region or country - depends pri­marily on the quality of economic policy. Where we find in the developing world good environments for households and firms to save and invest, we generally ob­serve poverty reduction.

I find the audacious claim that policy reform can cut world poverty in half a little daunting - even more so since Collier and Dollar base their results on an unpublished growth regression by me! (Like firearms, it is dangerous to leave growth regressions lying around.)

The International Monetary Fund (2000) also claims that “Where {sound macro­economic} policies have been sustained, they have raised growth and reduced poverty.” These claims are often held out as hope to economically troubled continents like Africa: “Policy action and foreign assistance... will surely work together to build a continent that shows real gains in both development and income in the near future.” Unfortunately, this claim was made in World Bank (1981) and the “real gains” in Africa have yet to arrive as of 2003.

Do the ambitious claims for the power of policy reform find support in the data? Are they consistent with theoretical views of how policy would affect growth?

The large literature on the determinants of economic growth, beginning with Romer (1986), has intensively studied national economic policies as key factors influencing long run growth. In this chapter, I take a look the state of this literature today, both theoretical and empirical. I do not claim to comprehensively survey the literature. I focus the chapter on the question of how strong is the case that national economic policies (by which I mean mainly macroeconomic and trade policies) have economically large effects on the growth rate of economies.

I am in the end skeptical that national policies have the large effects that the early growth literature claimed, or that the international agencies claim today. Although ex­tremely bad policy can probably destroy any chance of growth, it does not follow that good macroeconomic or trade policy alone can create the conditions for high steady state growth.

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