The Cambridge Realist Workshop: Ha-Joon Chang on Institutions and Economic Development: Theory, History and Policy

Redactor: Jae Ho Chung, Queens' College

Monday, November, 28th

   Ha-Joon Chang recently gave a talk for the Cambridge Realist Workshop, organised by The Cambridge Social Ontology Group (for more information on the Realist workshop, please look at http://www.econ.cam.ac.uk/seminars/realist/index.htm). Dr. Chang provided a critical examination of the currently dominant view on the relationship between institutions and economic development. First, Dr. Chang pointed out that the dominant discourse suffers from a number of theoretical problems - its neglect of the causality running from economic development to institutions, its inability to see the impossibility of a free market, and its belief that the freest market and the strongest protection of private property rights are best for development. Second, he pointed out that the evidence showing the superiority of liberalized institutions relies too much on cross-section econometric studies, suffering from defective concepts, flawed measurements and heterogeneous samples. Lastly, he argued that the dominant discourse has a poor understanding of changes in institutions themselves, which often makes it take unduly optimistic or pessimistic positions about the feasibility of institutional reform.

   Dr. Chang argued that the dominant discourse suffers from two categories of problems. First, it almost exclusively assumes that the causality runs from institutions to economic development, ignoring the important possibility of reverse causality, i.e. economic development changes institutions. Second, in considering the ‘institutions to development’ part of the causality, the dominant discourse theorizes the relationship in a too simplistic, linear, and static way. Discussions regarding theoretical problems involved many provocative questions such as:

1)      Do better institutions lead to more effective economic development?

2)      Are liberalized institutions better for economic development?

A.      Do institutions that provide greater economic freedom lead to faster growth?

B.       Is a stronger protection of private property rights better for growth?

C.       Is the relationship between institutions and economic development always the same?

    Dr. Chang also noted that there is now a huge amount of cross-section econometric studies indicating a positive correlation between the degree of liberality of institutions and economic growth across countries. He presented several areas where potential problems arise regarding the evidence presented by the supporters of the dominant discourse:

1)      Cross-section versus time-series

2)      Measuring the quality of institutions

3)      Problem of sample heterogeneity

    Dr. Chang also noted that the dominant discourse has a poor understanding of how institutions themselves change. The issue of the costs of establishing and running institutions is ignored, making their proposals for institutional reforms appear more attractive than what they really are. In methodological terms, they are either hopeless optimistic about the prospects of institutional change (the Global Standard Institutions discourse) or unduly fatalistic (the climate-culture school). Dr. Chang argued that only theories taking into account both structural constraints and real human agencies seriously can guide us between these two extremes.

    Dr. Chang concluded that: “institutions have become politically too important to be left to those who believe in these simplistic and extremist arguments.” I strongly recommend his article to students who are interested in the role of institutions in economic development.

 His paper can be downloaded from: http://hajoonchang.net/downloads/pdf/JOIEInstitutionsAndDevelopment.pdf

Quincentenary Lecture by Professor Sir Mervyn King



Redactor: Inna Grinis

Fri, 25/11/2011 - 17:00 - 17:45
St John’s College, Cambridge Quincentenary Lecture
by PROFESSOR SIR MERVYN KING, GBE FBA
Governor of the Bank of England

“The Global Financial Crisis"

   In 30 minutes the Governor presented the emergence and the development of the global financial crisis. His main message was that it is important not to confuse symptoms with causes.

    The latter go as far as the collapse of the Soviet Empire and the disappearance of an alternative to capitalism. From the late 1980s emerging economies started adopting market reforms and focusing on trade surplus growth. Capital flew not from the developed world to the developing one, as common sense would suggest, but the other way round. For instance China accumulated $3 trillion of Treasury bills by 2011.  Unfortunately the recipient countries did not have enough profitable investment projects, and this inflow of cheap money pumped consumption to unsustainable levels, and translated into bubbles in housing and stock markets.

     Mervyn King stressed that imbalances are the major cause of this crisis. In the context of Europe competitiveness disparities have accrued since 1999 with Nordic countries, such as Germany or the Netherlands, running 5% trade surpluses, while the periphery countries accumulated 10% deficits. Someone had to finance these, and until last summer this role had been undertaken by the private sector. The Bank sector debt rose from 100-200% of GDP to 500%. However this could not last forever, and the liquidity crisis began on the 9^thof August with BNP Paribas Investment Partners freezing their three investment funds, and the BCE injecting 94.8 billion euros into the financial system.

    The actual amount of subprime mortgages was not big enough to provoke such a crisis. It was the huge amount of bets on the mortgages - whether they would be repaid or not - that plunged western economies into this crisis. After BNP Paribas’ filial had suspended its three investment funds, it turned out that all the big banks had been involved. The sum of gains and losses should have been zero, but simple economic arithmetic could not work in this case since no one knew who the real gainers and losers were.  Mistrust took place and banks stopped lending to each other. Indeed banks’ leverage dropped from £50 to £20. Governments had to save these banks by recapitalising them, but at the time no one asked whether they could afford doing so. Hence debt was transferred from the finance sector to the public one. 

      The Great Panic has already destroyed 3 million jobs, and, as the Governor said at the beginning of his speech, no one has the ability to forecast the future.