Thursday, January 05, 2006

Dumb Luck!

Arnold Kling at Econlog wrote:

"...If institutions are important, then this raises questions about how institutions get to be what they are. Are there strategies for achieving institutional reform, including ending corruption or strengthening property rights? Can institutions change suddenly, or do they evolve gradually? Why are we fortunate enough to have institutions that are conducive to growth, while other societies are stuck with dysfunctional institutions?"

Economists certainly know far more about how institutions perform once they are there already than how they come about in the first place. This is why it is so dangersous, in my view, for economists to give advice to countries that are underdeveloped.

These economists know almost nothing about how the relatively well functioning institutions come about, they only know some institutions once in existence (well defined and enforced property rights, relatively free media, check and balances in the political system) can generate good outcomes. Equipped with such extremely narrow and limited knowledge, they then tour around the world and give advice to underdeveloped countries. Needless to say, knowing how existing institutions function is a very different kind of knowledge from knowing how to bring about good institutions. And the record of economists in helping underdeveloped countries grow is dismal, I am afraid.

As to Arnold's question on why some countries have institutions that are conducive to economic development, while others are stuck in bad institutions, my answer is simple: DUMB LUCK!

I will write more on this topic...

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