Study Examines Causes of Healthy Economic Growth

Contact: Doug Gavel
Phone: 617-495-8290
Date: September 02, 2004

CAMBRIDGE, MA – Significant increases in national economic growth rates are more frequent than is commonly thought, but also highly unpredictable. That’s the conclusion reached by a group of researchers at Harvard’s Kennedy School of Government. Their study suggests that extensive institutional and policy reforms are not necessary to stimulate economic growth in the early stages of development. Even minor policy changes can trigger rapid growth over the better part of a decade.
The researchers examined 83 cases of economic growth spurts between 1957 and 1992. Cases were limited to those where a nation’s annual GNP per capita growth increased by at least two percentage points, and where the post-spurt growth rate averaged at least three-and-a-half percent for eight consecutive years or more.
The analysis indicates that such medium-term growth accelerations are not infrequent, nor tied to any specific formula. Indeed most cases are not preceded by major changes in economic policies, institutional arrangements, political circumstances, or external conditions.
The study finds that only 15 percent of growth accelerations are associated with major economic liberalization – such as opening up markets or introducing significant structural reforms – which implies that 85 percent of such accelerations take place in the absence of major liberalization. And fewer than one in five episodes of economic liberalization are followed by growth take-offs. Similarly, while more than half of growth accelerations are preceded by political-regime changes, only a tiny proportion of political-regime changes (14%) are followed by growth accelerations.
“Our research tells us several things,” said report co-author Dani Rodrik, Rafiq Hariri professor of international political economy. “It tells us that cataclysmic policy reforms are not necessary to get an economy moving in the right direction. Even little things, like sending pro-business signals or removing small obstacles to private investment, can help produce positive growth for eight years or longer. However, the study also tells us that the formula for producing longer-term economic growth remains unclear.”
The report was co-authored by Ricardo Hausmann, professor of the practice of economic development; and Lant Pritchett, former lecturer in public policy.
The study may be accessed online through the Kennedy School Working Papers website: http://ksgnotes1.harvard.edu/research/wpaper.nsf/rwp/RWP04-030?OpenDocument

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