Economic Growth: Shared Beliefs, Shared Disappointments?

There are two widely-held views on economic growth: 1) it is a natural outcome of getting ‘the basics’ right-- international integration, macroeconomic stability, and contract enforcement; and 2) it is hard, requiring a complete set of first, second, and third generation reforms that have little payoff until they are all implemented. Yet the evidence shows that growth accelerations do not naturally arise from the Washington Consensus basics, nor do they require extensive reform. Instead, accelerations are triggered by a more effective focus on identifying and removing the binding constraints to growth as they arise. This shifts the focus from creating a laundry list of reforms to using diagnostic signals to identify what particular constraints are holding back growth in a particular country at a particular time. Furthermore, growth involves not only coping with government failures, but also eliminating market failures. Therefore it is not just government sins of commission that drive down growth, it is also sins of omission: things that governments are not doing to overcome market failures. In many instances, there are ad hoc solutions that get the job done. Identifying and implementing such solutions requires a dynamic policy process where problems are identified and addressed, overcoming market failures while containing government failures. [Jointly published as Center for International Development Working Paper No. 125 and KSG Faculty Research Working Paper Series RWP06-030.]