Deep roots or current policies – what drives sustained prosperity differences across locations?

One big question for institutional economists. They always believe that institutions matter which can never be disputed. There are some other extremes who say it is the only thing that matters.  So as long as instis are fine, development will prettty much be automatic.

Mercedes Delgado, Christian Ketels, Michael Porter and Scott Stern point to this interesting case of Botswana. It has the instis but current policy has messed up prospects:

There is a consensus among economists that ‘deep roots’ – geography, natural endowments, and institutions – are important determinants of prosperity differences across countries. This column argues that deep roots matter, but they are neither the whole story nor an excuse for political inaction today. Current policies are important – especially the broad range of policies that shape the business environment and the sophistication of companies – and they are affected but not determined by the past.

A good illustration of how these findings are manifested in a particular country is Botswana. The country has been hailed as one of the most successful development stories of the last 40 years, and has become a frequently cited case in the ‘deep roots’ literature – the country had a legacy of ‘inclusive’ institutions that enabled the creation rather than the extraction of wealth (Robinson et al. 2003). Seen as a poor outpost with little potential, Botswana experienced a relatively mild form of colonisation that left its traditional institutions largely intact. And while it had to deal with the challenges of being land-locked, it had access to significant natural resource wealth in the form of diamonds (McCord and Sachs 2013).

When the country gained independence in 1966, it was very poor. Its impressive subsequent growth has in the literature been explained by its institutional strength that enabled the productive investment of its natural resource wealth.

But the country’s path to higher prosperity is getting more challenging; recent analyses reveal how Botswana is finding it increasingly difficult to make effective policy choices at the higher levels of prosperity it has now achieved (World Bank 2012). The dependence on diamonds remains as high as ever, and the numerous attempts at economic diversification (e.g. Government of Botswana 2008), the attraction of foreign companies, and the development of a strong domestic private sector have so far achieved only muted success.

Our framework allows for a detailed assessment of Botswana’s competitiveness profile underlying these outcomes – on social infrastructure and political institutions (SIPI), the country ranked 44th in our sample of 144 countries assessed in 2013 (31st in a sample of 74 countries tracked since 2002). On microeconomic competitiveness, however, it ranked only 92nd (63rd in stable sample), with particularly weak rankings (108th; 69th in stable sample) for the sophistication of company operations and strategies. The trends over the last decade we examined indicate that the gap between SIPI and microeconomic fundamentals has even increased – while macroeconomic competitiveness has remained stable, microeconomic competitiveness has eroded.

The central policy challenge in Botswana, then, is heavily microeconomic – systematically upgrading firms and the microeconomic business environment. For institutional development and monetary and fiscal policies there is a fair amount of consensus on what constitutes best practices that countries should adopt. The number of individual policy areas in this field is manageable, and they are mainly influenced by government. Microeconomic upgrading is often more difficult given the sheer complexity in the number of interacting policy areas and in the need to involve multiple stakeholders. Policymakers in Botswana face complex choices on where to start and how to ensure implementation. Good basic institutions make it easier to face these choices. But as the country is learning, they do not ensure that the right decisions will be made or that execution will follow.

I am not sure why this debate even comes. It is not that instis alone matter. You have to move on and make sure that good instis are used to make economic development. And then it is also not right that people can ignore historical factors. By ignoring history we just try and superimpose some ideas which might never work given the historical background. We keep looking for unified theory when there is none:

Our cross-country analysis and the case of Botswana point towards the need for integrating the different perspectives on drivers of cross-country prosperity differences that are often positioned as alternatives in the literature. Deep roots matter but they are neither the whole story nor an excuse for political inaction today. Current policies are important – especially the broad range of policies that shape the business environment and the sophistication of companies – and they are affected but not determined by the past. Effective policy advice needs to understand both the current policies and the deep roots that influence the way these policies emerge and translate into sustained prosperity gains. Researchers and policymakers looking to provide country-specific advice for prosperity upgrading are well advised to take a close look at the full range of factors that drive foundational competitiveness rather than focus on identifying one generic overarching factor.

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