Moreover, even when we agree that certain institutions are ‘good’ or even ‘necessary’, we have to be careful in specifying their exact shapes. In Chapter 3, I have shown that for just about every institution, there is a debate on what exact form it should take. What type of bureaucracy is good for development? How strongly should property rights regimes protect existing property rights? How debtor-friendly should a bankruptcy law be? How independent should the central bank be? The questions could go on. Deciding exactly which variety of which institution is necessary for which type of country is beyond the scope of this book. However, I hope my discussion in Chapter 3 has shown that the currently dominant view that there is only one set of ‘best practice’ institutions (which usually mean Anglo-American institutions) which everyone has to adopt is highly problematic.
However, arguing that many of the institutions currently recommended by the ‘good governance’ discourse may not be necessary or even beneficial for the currently developing countries should not be interpreted as saying that institutions do not matter, or that developing countries do not need improvements to their institutions. On the contrary, improvements to the quality of institutions seem historically to have been associated with better growth performance, an observation that we can easily support with historical and contemporary evidence.
As we can see from table 4.1, annual per capita income growth rates among the 11 NDCs for which data are available during the 1820-75 period ranged between 0.6 per cent (Italy) and 2 per cent (Australia), with the unweighted average and the median values both at 1.1 per cent. The table also shows that, between 1875 and 1913, per capita income growth rates ranged between 0.6 per cent (Australia) and 2.4 per cent (Canada), with the unweighted average at 1.7 per cent and the median at 1.4 per cent. Given that the NDCs had seen a significant development in their institutions since the mid-nineteenth century (see section 3.3.1 of Chapter 3), it is very plausible that at least a part of this growth acceleration was due to the improvements in the quality of their institutions.
The vastly superior economic performance of the NDCs during the so-called ‘Golden Age of Capitalism’ (1950-1973), when compared to that of the periods before and after, also highlights the importance of institutions in generating economic growth and stability. During the Golden Age, the NDCs typically grew at 3-4 per cent p.a. in per capita terms, in contrast to the 1-2 per cent rate that had prevailed before it (see table 4.1) and also in contrast to the 2-2.5 per cent rate that has been typical since its end (see table 4.3 – more on this later). According to the estimate by Maddison (1989), per capita income in the 16 largest NDCs grew at 3.8 per cent p.a. during this period, with countries like Japan (eight per cent), Germany, Austria (both at 4.9 per cent) and Italy (4.8 per cent), notching up previously unimaginable growth rates.[9] Most commentators attribute the Golden Age in the NDCs to the introduction of better institutions following Second World War, such as activist (Keynesian) budgetary institutions, fully-fledged welfare states, stricter financial market regulations, corporatist wage-bargaining institutions, institutions of investment coordination and in some cases nationalized industries (especially in France and Austria). It is widely agreed that these institutions helped the NDCs to grow quickly by providing them with greater macroeconomic and financial stability, better resource allocation and greater social peace.[10]
| Table 4.1 | ||
|---|---|---|
| Per capita annual growth performance among the NDCs in earlier times | ||
| 1820-1875 (per cent) | 1875-1913 (per cent) | |
| Australia | 2.0 | 0.6 |
| Austria | 0.8 | 1.5 |
| Belgium | 1.4 | 1.0 |
| Canada | 1.2 | 2.4 |
| Denmark | 0.9 | 1.6 |
| Finland | 0.8 | 1.5 |
| France | 1.1 | 1.2 |
| Germany | 1.2 | 1.5 |
| Italy | 0.6 | 1.3 |
| Netherlands | 1.1 | 0.9 |
| Norway | 0.7 | 1.2 |
| Sweden | 0.8 | 1.4 |
| UK | 1.3 | 1.0 |
| USA | 1.3 | 1.9 |
| Unweighted Average | 1.1 | 1.7 |
| Median | 1.1 | 1.4 |
Source: Calculated from Maddison 1995.
The comparison of growth performance in the NDCs in earlier times with that of the developing countries during the postwar period also provides us with some important insights into the relationship between policies, institutions and economic growth.
I would argue that the developing countries were able to grow faster in the early postwar period (1960-1980) than the NDCs had done at comparable stages of development, partly because they had much better institutions than the latter countries had had (see section 3.3.3 in chapter 3),[11] Table 4.2 shows that, during the period 1960-1980, today’s developing countries grew at about three per cent p.a. in per capita terms. This is a far superior growth performance to that which the NDCs managed during their ‘century of development’ (1820-1913), shown in table 4.1, when the average growth rates in the NDCs were around 1-1.5 per cent p.a ..
| Table 4.2 | |||
|---|---|---|---|
| Per capita GNP growth performance of the developing countries, 1960-1980 | |||
| 1960-1970 (per cent) | 1970-1980 (per cent) | 1960-1980 (per cent) | |
| Low-income countries | 1.8 | 1.7 | 1.8 |
| --Sub-Saharan Africa | 1.7 | 0.2 | 1.0 |
| --Asia | 1.8 | 2.0 | 1.9 |
| Middle-income countries | 3.5 | 3.1 | 3.3 |
| --East Asia and Pacific | 4.9 | 5.7 | 5.3 |
| --Latin America and the Caribbean | 2.9 | 3.2 | 3.1 |
| --Middle East and North Africa | 1.1 | 3.8 | 2.5 |
| --Sub-Saharan Africa | 2.3 | 1.6 | 2.0 |
| --Southern Europe | 5.6 | 3.2 | 4.4 |
| All Developing Countries | 3.1 | 2.8 | 3.0 |
| Industrialised Countries | 3.9 | 2.4 | 3.2 |
Source: World Bank 1980. appendix table to part I.
Note: The 1979 and 1980 figures used are not final. but World Bank estimates. Given that the estimates were supposed to be on the optimistic side. the actual growth figures for 1970-1980 and 1960-1980 would have been slightly lower than those reported in this table.
All the above figures suggest that improving the quality of their institutions is an important task for developing countries wanting to accelerate their economic growth and development. However, two significant qualifications need to be made.
9
The 16 countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the UK and the USA.
11
Another reason behind this faster growth is that the world economy as a whole was growing faster thanks to the rapid growth in the developed countries, which account for the bulk of the world economy. I thank John Grieve Smith for raising this point. It should, however, be noted that, as pointed out above, this rapid growth in the developed economies also owed to the improvements in their institutions. On the role of world demand in the growth of developing countries during the 1960s and the 1970s, see Kravis 1970; Lewis 1980.