Institutions or macro policies: A case from Barbados and Jamiaca

Peter Blair Henry of Stanford University and Brookings has written a paper which questions the “Only institutions matter school”.

He uses an event study. Barbados and Jamaica inherited similar institutions from their colonial masters. Barbados got independence in 1966  and Jamaica in 1962 and had similar propery rights and legal system. So, both should have near similar econ performance going forward. However, Barbados’ GDP per capita grew 3 times of Jamaica and income gap is now 5 times. Why? Henry says it is because of macroeconomic policies pursued by the two.

Jamaica Govt spent more than its revenues and financed the deficit by borrwing from its Central Bank. This led to huge inflation and collapse in investment. It also nationalised companies, erected trade barriers and imposed exchange rate controls. Barbados despite starting with high inflation due to oil shocks, brought inflation down and managed its expenditure. It also avoided nationalisation and allowed private sector to prosper.

In the end, Henry says:

Differences in macroeconomic policy choices, not differences in institutions, account for the heterogeneous growth experiences of these two Caribbean nations.  

This is quite an interesting account of economic history. I am sure it would keep Acemoglu et al interested. However, the question that still remains unanswered is – why were the macroeconomic policies of the two different? What determines that a country (like Barbados) makes better macro policies than some other country (like Jamaica)? Was it just because of political economy? or did Brits miss (or did not add) something in Jamaica?

Interesting throughout.  Quite a stimulating paper.

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4 Responses to “Institutions or macro policies: A case from Barbados and Jamiaca”

  1. Institutions or macro policies: A case from Barbados and Jamiaca … | Ace Card's Caribbean Vacation Says:

    […] posted here: Institutions or macro policies: A case from Barbados and Jamiaca … acemoglu-et-al, barbados, barbados-linked, country, economics-macro, entry, financial, […]

  2. The role of policy volatility on growth « Mostly Economics Says:

    […] There is a lot of literature on what drives growth. Read the Growth Commission Report for insights and vast literature survey. One can also read the various papers available on the Growth Commission website.  All the numerous factors can be clubbed in two broad factors – macroeconomic policies and institutions. The research lately has stressed on role of latter (pioneered by Douglass North and advocated by Daron Acemoglu), and has even added that institutions determine policies as well.  (A counter was provided by Henry Blair in this paper) […]

  3. Institutions or macro policies: A case from Barbados and Guyana « Mostly Economics Says:

    […] or macro policies: A case from Barbados and Guyana By Amol Agrawal I had posted about a paper from Peter Henry Blair where he looks at whether macro policies matter or […]

  4. Economic Growth & Development: Latvia vs Croatia « Mostly Economics Says:

    […] its independence day on August 15). Then you compare South Korea and North Korea. One also looks at Barbados vs Jamaica and Barbados vs […]

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