Concluding remarks

Richard Feynman, the irreverent physicist who won the Nobel Prize in 1965 for his work on quantum electrodynamics, relates the following story. Following the award ceremony and the dinner in Stockholm, he wanders into a room where a Scandinavian princess is holding court.

“On the contrary,” I answered. “It’s because somebody knows something about it that we can’t talk about physics. It’s the things that nobody knows anything about that we can discuss. We can talk about the weather; we can talk about social problems; we can talk about psychology; we can talk about international finance... so it’s the subject that nobody knows anything about that we can all talk about!” [Feynman (1985)]

This is not the place to defend international finance (circa 1965) against the charge Feynman levels at it. But suppose Feynman had picked on economic growth instead of international finance. Would growth economists have a plausible riposte? Is the reason we all talk so much about growth that we understand so little about it?

It is certainly the case that growth theory is now a much more powerful tool than it was before Solow put pencil to paper. And cross-country regressions have surely thrown out some useful correlations and stylized facts. But at least at the more practical end of things - how do we make growth happen? - things have turned out to be somewhat disappointing. By the mid-1980s, policy oriented economists had converged on a new consensus regarding the policy framework for growth. We thought we knew a lot about what governments needed to do. But as my Martian thought experiment at the beginning of the paper underscores, reality has been unkind to our expectations.

Very few policy analysts think that the answer is to go back to old-style ISI, even though its record was certainly respectable for a very large number of countries. Cer­tainly no-one believes that central planning is a credible alternative. But by the same token, few are now convinced that liberalization, deregulation, and privatization on their own hold the key to unleashing economic growth. Maybe the right approach is to give up looking for “big ideas” altogether [as argued explicitly by Lindauer and Pritchett (2002), and implicitly by Easterly (2001)]. But that would be overshooting too. Eco­nomics is full of big ideas on the importance of incentives, markets, budget constraints, and property rights. It offers powerful ways of analyzing the allocative and distributional consequences of proposed policy changes. The key is to realize that these principles do not translate directly into specific policy recommendations. That translation requires the analyst to supply many additional ingredients that are contingent on the economic and political context, and cannot be done a priori. Local conditions matter not because economic principles change from place to place, but because those principles come in­stitution free and filling them out requires local knowledge.

Therefore, the real lesson for the architects of growth strategies is to take economics more seriously, not less seriously. But the relevant economics is that of the seminar room, with its refusal to make unconditional generalizations and its careful examination of the contingent relation between the economic environment and policy implications. Rule-of-thumb economics, which has long dominated thinking on growth policies, can be safely discarded.