3 - l3sachs

3 - l3sachs - Institutions Matter, but Not for Everything...

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HE DEBATE over the role of institutions in eco- nomic development has become dangerously simplified. The vague concept of “institutions” has become, almost tautologically, the intermedi- ate target for all efforts to improve an economy. If an econ- omy is malfunctioning, the reasoning goes, something must be wrong with its institutions. In fact, recent papers have argued that institutions explain nearly everything about a country’s level of economic development and that resource constraints, physical geography, economic poli- cies, geopolitics, and other aspects of internal social struc- ture, such as gender roles and inequalities between ethnic groups, have little or no effect. These papers have been written by such respected economists as Daron Acemoglu, Simon Johnson, and James Robinson; Dani Rodrik, Arvind Subramanian, and Francesco Trebbi; and William Easterly and Ross Levine. Indeed, a single-factor explanation of something as impor- tant as economic development can be alluring, and the institu- tions-only argument has special allure for two additional reasons. First, it attributes high income levels in the United States, Europe, and Japan to allegedly superior social institu- tions; it even asserts that when incomes rise in other regions, they do so mainly because of the Western messages of free- dom, property rights, and markets carried there by intrepid missionaries intent on economic development. Second, according to the argument, the rich world has little, if any, financial responsibility for the poor because development fail- ures are the result of institutional failures and not of a lack of resources. The problem is that the evidence simply does not support those conclusions. Institutions may matter, but they don’t matter exclusively. The barriers to economic development in the poorest countries today are far more complex than insti- tutional shortcomings. Rather than focus on improving institutions in sub-Saharan Africa, it would be wise to devote more effort to fighting AIDS, tuberculosis, and malaria; addressing the depletion of soil nutrients; and building more roads to connect remote populations to regional markets and coastal ports. In other words, sub-Saharan Africa and other regions struggling today for improved economic devel- opment require much more than lectures about good gover- nance and institutions. They require direct interventions, backed by expanded donor assistance, to address disease, geographical isolation, low technological productivity, and resource limitations that trap them in poverty. Good gover- nance and sound institutions would, no doubt, make such interventions more effective. When economic growth fails When Adam Smith, our profession’s original and wisest cham- pion of sound economic institutions, turned his eye to the poorest parts of the world in 1776, he did not so much as mention institutions in explaining their woes. It is worth quoting at length from Smith’s Wealth of Nations on the plight
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This note was uploaded on 01/23/2011 for the course HIST 123 taught by Professor Wharton during the Winter '09 term at Yale.

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3 - l3sachs - Institutions Matter, but Not for Everything...

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