David R. Henderson  

Tale of Two Islands

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Stanford University economists Peter Blair Henry and Conrad Miller recently published an interesting NBER Working Paper in which they compare economic policy and economic performance between Jamaica and Barbados.

Henry and Miller point out that in Jamaica, the People's National Party rose to power in the 1970s with the promise of "democratic socialism." Unfortunately, the PNP delivered, nationalizing companies, taxing trade, and imposing exchange controls. The PNP also distributed income through job-creation programs, schemes for housing development, and subsidies on food. Government spending rose from 23 percent of GDP in 1972 to 45 percent in 1978. The government financed much of its huge deficit by printing money, leading to 27 percent inflation by 1980.

The government of Barbados, by contrast, avoided nationalization and opened the country to trade. It also kept government spending under control although, unfortunately, Henry and Miller don't present data on government spending as a percent of GDP.

The economic results: between 1960 and 2002, real GDP per capita grew by an annual average of 2.2 percent in Barbados but only by 0.8 percent in Jamaica.

Henry and Miller pitch their study as a critique of the Douglass North view that institutions are crucial for economic growth. They point out that both countries were British colonies until the 1960s and, therefore, had a two-party political system, a free press, constitutional protection of property rights, and the English common law. The difference in performance, they say, was not due to different institutions but to different macro policy. But aren't such big differences in macro policy--nationalization and distribution of wealth in one case and not in the other--themselves a difference in institutions?

Update: Correction made, thanks to Bob.


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COMMENTS (14 to date)
Richard Squire writes:

Would it be more accurate to say that good institutions are necessary but not sufficient for growth?

Steven writes:

If institutions are defined too broadly, the claim that institutions matter is without content. Douglass North and others use a more narrow definition: institutions are constraints on the behaviors of actors, and are distinct from the content of particular policies. In this view, good institutions lead to good policies, which in turn lead to good outcomes. Henry and Miller refute this by finding two countries with similar institutions but very different policies and outcomes.

Bob writes:

Nationalizing countries or companies? (Second sentence, second paragraph)

parviziyi writes:

Barbados and Jamaica had quite different histories in the century prior to 1960, with a result that in 1960 education standards were higher in Barbados, western institutions were more solidly in place, and the overall economy was in better shape due to "social capital" factors. Jamaica's socialism was, in part, an effort to accelerate the progress of the "social capital" factors. And it cannot be said to have been a failure in that respect.

I recommend the comparision between Barbados and Jamaica in century after the abolition of slavery in the book "History of the Carribbean" by Jan Rogozinski. This is an excellent history book, all around. It makes the history of the Carribbean into a fascinating subject.

Barkley Rosser writes:

A major source of debate over North's view of institutions is whether or not organizations count as institutions. For North they do not, too superficial and peripheral, which would mean that policies as such would be even more so. For North, institutions are more like what Buchanan would call constitutional political economy, deeply embedded structures and rules (and constraints) on practices. Other institutional economists, such as Williamson or Greif, disagree.

Kurbla writes:

Possible reason for slow Jamaican economy can be crime (10 x more murders per cap. than US) and corruption. Sometimes additional explanation is not needed, see Northern vs Southern Italy for example. Article didn't addressed that issue.

Phil writes:

The differences in growth rates are from 1960, but the policy change cited started in 1972. Were growth rates roughly the same between the two countries from 1960-1971?

fundamentalist writes:

Institutions with the same names are not the same institutions if they have opposite policies. In the courts of one, property was respected, in the courts of the other property was looted. Those aren't the same institutions just because they are called courts.

North wrote a lot about markets and he contrasted traditional markets with modern ones. They're both markets, but have vastly different outcomes. Traditional markets are very personal and transaction costs are high because of the prevalence of cheating. Modern markets are impersonal with low transaction costs because of competition, guarantees, and courts that enforce laws on fraud and contract.

Most countries in the world have constitutions, but for most countries, they don't mean a thing. The constitution may guarantee property rights, but the state may still steal everything you have because the guys in power can do it.

Bob Murphy writes:

Unfortunately, the PNP delivered, nationalizing companies, taxing trade, and imposing exchange controls. The PNP also distributed income through job-creation programs, schemes for housing development, and subsidies on food. Government spending rose from 23 percent of GDP in 1972 to 45 percent in 1978. The government financed much of its huge deficit by printing money...

Hmm nationalization of companies, jobs programs, subsidies to the poor and housing, tax and spending hikes, and massive money pumping. Sounds familiar.

And those policies didn't work, right?

aa writes:

How do we know that the people of Jamaica would've preferred more growth at the expense of say safety nets and less income inequality?

James writes:

Kurbla,

East and West Germany in the 1970s provide another case showing the correlation of crime and corruption with poor economic outcomes. China and Hong Kong in the 1980s provide yet another example.

What do you think accounts for the higher levels of crime and corruption in Jamaica and East Germany and China than in Barbados and West Germany and Hong Kong?

Kurbla writes:

James, according to Encyclopedia of Crime and Punishment by David Levinson, there was about ten times less crime in East than in West Germany, and police was twice more efficient. In my experience, it is similar in other Eastern European countries (Yugoslavia, USSR, Czechoslovakia, Bulgaria, Albania). I believe it is ugly in China, but China economy is, I think, pretty much capitalist one.

Willem writes:

Dave, you seem absolutely right. I can't access the article you refer to, but in Institutions, Institutional Change and Economic Performance North definitively shares policy under the broader range of institutions. He does say that institutions put limits on what policies are feasible and what policies can attain. I see North as more of a historic perspective. History shapes local institutions which shape policy.

Jamaica shows that you can destroy an economy via the democratic way by voting for bad policies.

BlackSheep writes:

aa wrote "How do we know that the people of Jamaica would've preferred more growth at the expense of say safety nets and less income inequality?"

It's a matter of looking at history. We should expect networks such as Mutual Aid Societies emerge naturally.

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