International
Factors that account for the success or failure of countries to develop: Stanford Business School
By Finfacts Team
Jun 28, 2005, 10:53

Romain Wacziarg Associate Professor of Economics Stanford Graduate School of Business

A country's economic institutions, laws, demographics, and policies have a great deal to do with its level of prosperity, concludes Wacziarg, a member of the School's multidisciplinary political economy group who has researched the factors that account for the success or failure of countries to develop.

Wacziarg's work first takes into account the more obvious factors that affect economic growth -- what he calls the "proximate" causes: the accumulation of means of production and human capital, the development and adoption of technology, and the rate of depreciation of capital.

Much like corporations, without adequate technology and capital accumulation, countries cannot grow. Where the mystery lies, however, is in the factors that cause accumulation and the adoption of technology. These are the deeper causes of growth, the factors that affect the proximate causes themselves. "That's where it gets interesting," he says. These deeper causes are the structural features of an economy that shape the incentives to which firms and households are subjected -- its demographics, its institutions, its geographic characteristics, and its governmental policies.

For instance, Wacziarg has explored whether the political institution of democracy leads to more robust economic development. "Conventional wisdom is that democracy creates wealth, but this is hard to detect in the data because many autocracies such as Singapore and Chile have done quite well. On the other hand, wealth seems to promote the proper conditions for democracy to develop," he observes. In other words, growing countries ultimately become democratic. "Democracy certainly does not hurt economic growth, but neither is it a panacea," he says.

What's more important to a country's development, Wacziarg has found, is whether its economic institutions protect people's right to own land, machines, factories, shares of stocks, and other commodities. "In countries that lack this kind of contracting environment, there is no incentive to invest or innovate because the products of your investment will not be secure," he says. "Without such transactions, there is less exchange, and gross domestic product is lower." Chile, he says, is one country that was able to thrive economically in the 1970s despite being a dictatorship because it provided good economic protections and incentives for business.

Wacziarg's research also sheds light on the debate over whether free trade enhances or diminishes a country's economic performance. "The bottom line is that trade is, on average, good for growth," he says. "Those that embrace trade tend to grow faster, and the effects can be tremendous in magnitude." In one study he found that after external reforms in the 1990s, India's annual growth rate increased by 1.5 percent. "That's huge if you compound it over decades," Wacziarg says. "If the U.S. had grown one percentage point less annually than it has since 1870, it would be at the level of income of Mexico today."

Recently Wacziarg has explored the role of demographics -- particularly mortality -- in economic growth. In a paper coauthored with Business School colleagues Peter Lorentzen and John McMillan, he documents that in countries where people tend to die earlier, there is less incentive to invest in business because there is less time for individuals to reap the benefits of their investments. In Sierra Leone, for example, where a 15-year-old has a 57 percent chance of dying by age 60, putting money into a business is not a tremendously exciting prospect. Where horizons are short, investing does not pay.

Villagers plant coconut trees and rebuild a sea wall near Banda Aceh, Sumatra, Indonesia (Photo FAO)

Another drawback of short horizons is that in countries with high mortality, population growth rates are actually very rapid. "People in such areas have more children as insurance against the fact that many of their children are likely to die," Wacziarg says. So even though people die young, population grows fast. High population growth leads to a lower standard of living. "The issue is that the more the population grows, the more machines are needed to maintain the same output per person," he says. "That causes an economic strain for poor countries."

Wacziarg's overall research program aims to characterize the main structural features conducive to economic development and to quantify their respective roles. His work on democracy, trade policy, and demographics is but the start of a research agenda that should ultimately lead to a better empirical understanding of the growth process.

Romain Wacziarg's research papers