One Economics, Many Recipes: Globalization, Institutions, and Economic Growth
by Dani Rodrik
Chapter 2 (coauthored with Ricardo Hausmann and Andres Velasco) focuses on igniting economic growth. It presents a framework foridentifying “binding constraints” on growth, so that reform strategies canfocus on areas with the biggest immediate impact. The diagnostics revolve around a decision tree. Starting from the very top, growth can be constrained by inadequate social returns, by a large wedge between social andprivate returns (lack of appropriability), or by poor access to finance. Economies suffering from each of these different constraints throw out different signals. For example, a finance-constrained economy is one wherereal interest rates are high, current account deficits are large, and investment is highly responsive to exogenous foreign inflows (e.g., remittances).The diagnostic analysis begins by trying to identify which of these areaspresents a more serious constraint, and then moves one level down. For instance, if low social returns are identified as the constraint, the next question turns on whether the reasons for that have to do with poor geography,low human capital, or inadequate infrastructure. The analysis continues infractal fashion at successively finer levels of resolution until the list of binding constraints is narrowed to a set small enough to be amenable to policy.The chapter discusses the application of this approach to three Latin American countries: El Salvador, Brazil, and Dominican Republic.
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