Wednesday, July 17, 2019

The problem of economic growth: Cultural disconnects in the developing world

Here’s a conversation between Tyler Cowen and Paul Krugman:

I’m interested in remarks starting at about 23:25. Krugman is speaking:
Paul Krugman: In the end we just do not know very much about what total factor productivity, we don’t know very much about what causes productivity growth to rise or fall. Leaving aside growth, just look at level differences among countries. You have huge differences, the basic technology is available everywhere. Everyone has access to the book of blueprints we used to say. And yet you have vast differences among countries and at a fundamental level we don’t know why some countries do much worse than others at making use of that available technology.... The trouble is...economics, which suggests that people take advantage of opportunities and if there’s a better technology people should use it, has a very hard time coping with the evidence that in many cases they don’t. That countries or at least they don’t seem to be able to find a way to take advantage of these possibilities. Whatever it is that makes workers in the United States ten times as productive as workers in a lot of the emerging world still. The fact that countries don’t find a way to close that gap ... would seem to be so much gain if they could do it, remains a deep puzzle.

Tyler Cowen: I would give a slightly different but I think not incompatible answer. People love to debate big governance versus small government. When I look at the data it seems to me that quality of governance is all important. So Brazil is a pretty big government but it’s very poorly run so no one wants to defend it. Denmark maybe has a government that would appear too costly to support but they manage just fine. And quality of governance can change fairly quickly in some cases. And we as economists don’t really have good theories of the quality of governance. Now I think this leads back to your TFP. If you have poor quality of governance, if you know the Parenti-Prescott model of monopoly you put up barriers to keep your domestic monopolies, you keep out TFP because out TFP threatens your domestic monopolies. And that’s why the poorer countries don’t adopt better technology. They’re not unwilling to, like they’re willing to use cell phones if they can do that in standalone fashion. But they have poor quality of governance, domestic monopolies, TFP is kept out, but we can’t explain governance very well.

Krugman: I would much travel do you do in developing countries?

Cowen: Lots and lots.

Krugman: OK, sorry. Condolences.

Cowen: A hundred countries maybe.

Krugman: I don’t know how it strikes you. But what always strikes me is actually the high technology is all there. It’s the little things like actually managing to have roads that are passable, that are where things fall apart. As you say, it’s very hard to explain why that is so different among countries.

Cowen: There’s some high technology. There’s not nearly as much and quality of management is much lower. There’s lower trust, which is a kind of governance. So you cannot delegate so easily, everything goes through rigid hierarchies, even in the private sector. Even using the same technology an Indian factory can be one tenth as productive as, say, a Western factory in some but not all cases.
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Let me suggest that the cultural ranks theory David Hays and I built would be a very useful tool for thinking through these kinds of problems. It’s certainly not plug-and-play, but if you want to think about forms of governance, trust, organizational structure, levels of technology and so forth, we’ve got a coherent conceptual framework that ready for action.

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