Empirics
The literature tracing effects of economic policies on growth is abundant. I do not attempt to summarize it here, noting the summaries in Sala-i-Martin (2002), Temple (1999), Kenny and Williams (2001), and Easterly and Levine (2001).
Some authors focus on openness to international trade [Frankel and Romer (1999)], others on fiscal policy [Easterly and Rebelo (1993a, 1993b)], others on financial development [Levine, Loayza and Beck (2000)], and others on macroeconomic policies [Fischer (1993)]. Dollar (1992) stressed a measure of real exchange rate overvaluation as a proxy for outward orientation and thus a determinant of growth. These papers have at least one common feature: they all find that some indicator of national policy is strongly linked with economic growth, which confirms the argument made by Levine and Renelt (1992) - even though Levine and Renelt found that it was difficult to discern which policy matters for growth. The list of national economic policies that have received most extensive attention are fiscal policy, inflation, black market premiums on foreign exchange, financial repression vs. financial development, real overvaluation of the exchange rate, and openness to trade. The recommendation that countries pursue good policies on all these dimensions was labeled by Williamson (1990) as the “Washington Consensus”.I distinguish policies from “institutions”, which have their own rich literature [see Acemoglu, Johnson and Robinson (2001, 2002), La Porta et al. (1999, 1998), Kaufmann, Kraay and Zoido-Lobaton (1999), Levine (2005)]. Institutions reflect deep- seated social arrangements like property rights, rule of law, legal traditions, trust between individuals, democratic accountability of governments, and human rights. Although governments can slowly reform institutions, they are not “stroke of the pen” reforms like changes in the macroeconomic policies listed above. I will consider at the end the relative role of policies and institutions in development.
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