Economic Policy, Institutions and Economic Growth in an Era of Globalization
Casey, Terrence C., The Journal of Social, Political, and Economic Studies
The author surveys economic development theory and concludes that policies that conform to a nation's institutional context are likely to be more successful than those involving radical social reconstruction. The author then explores the implications of this argument for the ability of different national institutional contexts to adjust to the changes brought about by globalization.
Key Words: Institutions, economic development, globalization, Great Britain
Understanding the process of economic growth and development is a central concern to academics and policy-makers alike, particularly as the rates of growth across countries vary widely. Clearly the economies of some states do a better job at increasing national prosperity than others. But why? Explaining variations in economic growth and development across countries is crucial, but the answers to these questions are highly controversial.
Within political science, the focus on how to explain this phenomenon has shifted over the years. During the first twenty-five years of the postwar era, Keynesian demand management was held as the sine qua non of stable, long-term growth. During this golden age of rapid growth, differences in performance were considered a question of the appropriate fine tuning of the economy within a broadly Keynesian framework. But the Keynesian consensus foundered on the shoals of oil crises and stagflation in the 1970s. Two intellectual and policy trends resulted. First, the elections of Margaret Thatcher in Britain and Ronald Reagan in the U.S. initiated the long march of neoliberal ideas and policy to their currently dominant position across the industrialized world. At the same time, the perception that some states had weathered the storms of the 1970s much more successfully than others focused attention on microeconomic (or industrial) policies. The ability of states like Japan, France and the Asian Newly Industrialized Countries (NIC's) to couple high growth with low unemployment was attributed to the various tools of sectoral intervention used to restructure their economies towards competitive, high value-added industries. A flurry of academic works followed, each noting how various policies and institutions of these so-called "developmentalist states" explained their success.l Given the stark contrast of these arguments with the neoliberal belief that the state need only retreat from the market to secure growth, academic and political debate throughout the 1980s largely revolved around the pros and cons of industrial policies.
The intellectual ground shifted once again in the 1990s. The long-term efficacy of the neoliberal solution was called into question as Thatcher's Britain and Reagan's America plunged sharply into recession in the early 1990s. Yet the theoretical victory of those who favored more interventionist solutions was short-lived. The late 1990s have seen the return of high growth and low unemployment in America and Britain. In contrast, the heroes of the interventionist cause have faltered. The political consensus in Germany and France has been rocked by unemployment stuck in double-digits despite relatively brisk growth. More significantly, the economy of Japan, the epitome of state-led growth, has collapsed, leading to a general Asian economic crisis that has since spread to Russia. Of significance is that it is the very institutional structures of these countries that commentators encouraged others to emulate that are now producing economic failure. The corporatist welfare states of France and Germany burden firms with high labor costs (and thus low labor productivity) and have created a rigid labor market unable to adjust easily to changes in the global economy.2 The foundation of the "Japanese model" - the close connection between firms and banks, strategically guided by government officials - led to banks maintaining investments in failing firms, which has overburdened the banking system with bad debt and left firms desperate for increased sales and investment. …