Tale of Two Islands
Stanford University economists Peter Blair Henry and Conrad Miller recently published an interesting NBER Working Paper in which they compare economic policy and economic performance between Jamaica and Barbados.
Henry and Miller point out that in Jamaica, the People’s National Party rose to power in the 1970s with the promise of “democratic socialism.” Unfortunately, the PNP delivered, nationalizing companies, taxing trade, and imposing exchange controls. The PNP also distributed income through job-creation programs, schemes for housing development, and subsidies on food. Government spending rose from 23 percent of GDP in 1972 to 45 percent in 1978. The government financed much of its huge deficit by printing money, leading to 27 percent inflation by 1980.
The government of Barbados, by contrast, avoided nationalization and opened the country to trade. It also kept government spending under control although, unfortunately, Henry and Miller don’t present data on government spending as a percent of GDP.
The economic results: between 1960 and 2002, real GDP per capita grew by an annual average of 2.2 percent in Barbados but only by 0.8 percent in Jamaica.
Henry and Miller pitch their study as a critique of the Douglass North view that institutions are crucial for economic growth. They point out that both countries were British colonies until the 1960s and, therefore, had a two-party political system, a free press, constitutional protection of property rights, and the English common law. The difference in performance, they say, was not due to different institutions but to different macro policy. But aren’t such big differences in macro policy–nationalization and distribution of wealth in one case and not in the other–themselves a difference in institutions?
Update: Correction made, thanks to Bob.