Monday, September 20, 2010

Technologies Drive Growth, Rules Drive Development

A summary of comments by Paul Romer on development and growth at USAID conference-

Initially, he was first asked to speak about Aid Effectiveness but he wanted to talk about effective comparative to what. He thinks we should still be realistically ambitious and part of that is to look at best successes – China and development of US, including the expansion of the US frontier.

In his view, the key element regarding China’s development as well as the history of US lies in the concept of norms and rules. (He chooses not to use the words governance and institutions as they sometimes have certain connotations).

First, he outlined the difference between the sharing of ideas versus objects. Ideas are non rival compared to objects which are finite. Objects are finite - the more people around the fewer objects for each. However with ideas, the more people, the more ideas are developed. So the non rivalry of ideas and the power that comes from sharing amongst each other is inherent in successes of globalization, urbanization, and communication networks. The discovery and sharing of ideas helps countries that were behind, to catch up economically and developmentally.

He then linked ideas with the development of rules and used the example of Mauritius where a change of rules helped with rapid expansion of economic growth. If you can change rules, technology transfer can be done more quickly which supports economic growth. China has experienced that same dynamic – a change in rules led to special zones, foreign investment, increased expertise, a dramatic increase in manufacturing and rapid increase in economic growth and income. He posits that the puzzle of development needs to be framed around persistent stagnation – growth isn’t surprising, but stagnation is. Why do inefficient rules and ideas persist, limiting growth?

Then, he discussed formal versus informal rules, whereby formal rules are enforced through laws and informal ones are cultural, decentralized, and socially based. Informal laws are flexible and can lead to multiple equilibriums – what your norms are of right and wrong are based on what you see around you. All kinds of rules are enforced by informal norms. Norms can be functional at one point that become dysfunctional later – for example, norms regarding sharing versus norms of individual responsibility and work. But norms are very hard to change. So the answer to why rules can be so wildly inefficient for so long, although could sometimes change, has to do with the stability of norms.

Economists are much too ready to assume rules that are once and done – establish laws and then you’re done. But rules might need to change over time. Need new rules based on new technologies. Another driver of change is scale – rules and social norms that were designed for a small group of people and with scale you now need formal rules and then enforcement. So need to think about “metarules” – what are the rules for when you need to change the rules.

Norms are socially determined, as well as based on persuasion and the educational system. Efficient rules depend on the technologies, patterns of interaction, and distribution of norms in a population. Substitution between formal and informal rules depends on the norms that exist in different parts of the world – so formal rules aren’t always universal. Dynamics of informal rules and norms can trap groups making the shift to new rules and processes difficult. You see this in the business world where large corporations often can’t be as flexible as a startup – they are stuck with older norms that are harder to shift.

Executive action can change norms – i.e. the anticorruption commission created in Hong Kong, which was coupled by anticorruption campaign. It undermined corruption as an accepted norm. But how do you translate this to other contexts?

One way is to focus upon start ups and new norms. The notion of a start up is an important metarule – new initiatives have a chance to set up fresh and good norms. You can create a new set of norms among people who share your concepts, create a model and then acculturate the newer people to follow these standards, thus expanding the norms and rules outward.
This theory is behind his assertion that new Charter Cities can be an important development tool. Romer feels it would be possible to create hundreds of cities that are set up with new norms, special zones where new rules can be implemented, so you can recreate what happened in the US when it was developing and expanding its frontier. That situation, the new US cities attracted outsiders through opportunities and services. One can replicate this success by creating a competition of new cities, such as having hundreds of Dubais, where there would be competition for better living standards. The timing is ripe for this method as the world continues to urbanize currently – once the world’s population stabilizes and people stop moving into new cities, this start up concept will no longer be possible. So we need to look at meta rules beyond just voting, but start ups and other ways to affect norms which impact economic growth and development.

Listen to the discussion

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