Thursday, November 22, 2012

Create inclusive institutions and call me in a century!

Daron Acemoglu may well be the pre-eminent economist of our time.  Acemoglu and Johnson (along with other coauthors) have written massively cited and highly influential journal articles.

But their overarching theory in "Why Nations Fail" just won't wash, at least for prediction and policy.

Full disclosure: I have not read the entire book (give me a break here people, "reading the book" is a very over-rated strategy)!

But, I have read and taught their papers and followed the review and counterattack cycle that reached its peak this week with their diatribe against Jeff Sachs.

There are two basic problems for the relevance of their theory:

1. Mrs. Angus and I show that across countries from 1960 - 2000, "institutions" are converging, while output is diverging.

2. Institutions move slowly while in most of the world growth, even in the medium term, is volatile. See "The anatomy of start-stop growth" or "growth accelerations".

So, "inclusive institutions are necessary (and sufficient?) to sustain long run growth"is just not a very relevant or helpful statement for poor countries or policymakers over a 5 - 25 year horizon.

"Create some inclusive institutions and call me in a century", is not going to get you appointed as chief economist at any IFI anytime soon. Nor will it get you elected in a developing country.

Nor should it.

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