Institutions+vs.+Policy+A+Tale+of+Two+Islands


 * “Institutions vs. Policies: A Tale of Two Islands **
 * Henry and Miller **

// *Note: this article is actually just a working paper, and only ten pages long. Their argument is fairly simplistic, and if you just read my summary and skim it, you should probably understand it pretty well. //

Summary by Sonja
 * Main argument: ** Common assumptions about property rights and remnants of colonial legal systems do not hold weight when it comes to explaining the discrepancy between Barbados and Jamaica’s standard of living divergences over time. Instead, the authors look at macroeconomic fiscal policy to explain the differences, and hold that policy holds better clues as to the differences between the two countries.
 * Outline: **

Literature Review: · Secure property rights are generally assumed to be the best explanation in determining differences between economic development/standard of living between states (Smith 1776, Lewis 1956, North 1990). · Causation is determined by showing colonial powers’ influence and corresponding levels of development years later. · This approach is more institutional in nature, and focuses on east/west Germany and the Asian countries. · Puzzle: Jamaica and Barbados are both previously colonized, and have strong property rights and maintained the English Common law. The prevailing literature that spotlights institutional influence on development does not explain their differences in development. Case Selection · The authors hold factors constant by selecting two cases that are “both former British colonies, small island economies, predominantly inhabited by the descendants of Africans. . . . [with] almost identical political, economic, and legal institutions” (2). · Both organized their governments after the British parliamentary democracy. · Both explicitly protect private property in the constitutions. · Both maintained English Common Law. Jamaica · Grew until the classic Dutch Disease took over: growth in bauxite trade drove prices up, and reduced Jamaican competitiveness in the agriculture sector, and prompted migration from the rural areas to urban ones. · There was a corresponding party transition, and the government began to overspend. They also followed IMF recommendations and de-valued their currency in order to promote economic growth · They had a high degree of nationalization, and the state took over ownership of flailing industries. Barbados · Kept nationalization to a minimum · Did not devalue currency, but rather tied it to the US Dollar. · Kept government spending under control Lessons learned · Despite similarities in institutions, Jamaica and Barbados retain a high degree of difference in their development trajectories. This difference can be explained through macroeconomic policy. · The conclusions drawn here might not travel well, but they do question the prevailing assumption that it is just property rights and rule of law that spurs on economic development.