Institutions, Economic Performance and the Visible Hand

Institutions, Economic Performance and the Visible Hand

Theory and Evidence

Ashok Chakravarti

The book challenges the conventional wisdom on the determinants of economic performance and provides an alternative vision of the functioning of an economic system. The author provides a structured survey which critically evaluates the theory and evidence of neoclassical approaches to growth and development. He then skillfully integrates insights from the old and new institutional economics into an original and comprehensive vision of the relationship between institutions, growth and economic development.

Chapter 5: Institutions and Governance: The New Empirical Evidence

Ashok Chakravarti

Subjects: development studies, development economics, economics and finance, development economics, institutional economics

Extract

The application of the principles of neoclassical theory to the problems of growth and development is to be found in the neoclassical growth model. The approach assumes that all countries are on the same production function, so that differences in physical capital, labour, and human capital, generate the differences in output (Solow 2001). This vision has been fundamental to mainstream development thinking for the past 60 years. Based on this framework, it is possible to elaborate a series of propositions that lend themselves to empirical testing. The empirical literature testing the neoclassical growth model consists of studies that use either growth accounting techniques based on a Cobb-Douglas or similar neoclassical production function, or crosscountry regressions, that have variables that are generally utilized to reflect factor accumulation as independent parameters to explain variations in GDP growth rates. One of the earliest studies is that of Abramovitz (1956). Considering the sources of increase of national income in the US between 1870 and 1953, he found that while net national product per head increased by 400 per cent during this period, productivity per head rose by 250 per cent. Based on this finding Abramovitz concluded that the main source of growth of output was not the labour or capital input per capita but the ‘complex little understood forces which cause productivity to rise’. Subsequent work by Young (1995), and Collins and Bosworth (1996), with data refinements including proxies for human capital, has reversed these findings. They found that most of the contribution to...

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