Sunday, September 25, 2011

Determinants of Economic Growth - Robert J. Barro

"Being poor, which Sierra Leone and other African countries surely are, is not enough to generate high growth."
-Robert J. Barro

Most questions on economics are open to debate: is there a catch-up phenomenon for developing countries? Arguably, poor countries have more potential to grow faster (see China); however, countries in extreme poverty may lack the conditions necessary for the establishment of somewhat efficient markets. Does democracy promote growth? Some might argue -like F. A. Hayek- that democracy and capitalism always come together. Others can say, not without reason, that extreme participation and popular demands, especially on land reform and property rights, might serve as a  hindrance to growth.

These questions can go on forever, with all sides of the debate having room for a plausible and well articulated argument. However, Fortunately, we have econometrics to gather evidence on these questions and have some guidance for policymaking. In 1997, Robert Barro, from Harvard University, delivered three lectures at the London School of Economics trying to answer three questions: is there a catch up process between developing and developed countries? Does democracy promote growth? Does inflation hinder growth? After a thorough econometric analysis,  Barro's answers are: somewhat, up to an extent, and after a certain level. The three lectures are compiled in Determinants of Economic GrowthIdeologues and pundits might not like books like Barro's because they do not provide clear cut and straightforward answers. (to be honest, Barro's answers are clear cut and straightforward; they just do not divide the World in black and white, which is what ideologues and pundits do)

I do not want to leave the impression that econometrics is the key to answer all our questions. On the one hand, any decent econometrician knows that all models are rubbish: econometric models are just a way to simplify the policy debate. Without intellectual speculation and experiments, econometrics is just a simple average. Economists also have a vested interest in making economics and econometrics look more complicated than they actually are, so we should not take them too seriously, anyway.

On the other hand, we only have fifty years of decent data  (the U.S. is an exception with series that go back up until the 1800s) for most countries, and only twenty for the two emerging Asian powers: India and China. Fifty years is nothing compared to the almost 300 years of capitalism, and even 300 years is nothing compared to the 2,000 years of the Modern Era.  Maybe, in the end, liberal democracy is nothing else than a historical accident and all these experiments will be irrelevant in 500 years...

Econometrics is an imperfect tool, but that's all we have to analyze social sciences. Imperfect beings cannot create perfect tools. That's Philosophy 101...

Here's Barro's personal webpage.
And here are his datasets.

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