Connect with us

The Return of the Washington Consensus? William Easterly, Good Economic Policy, and Economic Growth in India

This paper engages with a specific effort by Easterly (2019) to solve the liberalization–economic growth paradox. This paradox centers on the failure of significant global economic liberalization after 1980 to generate a clear increase in global economic growth—despite the powerful theoretical and empirical predictions of the likely impact of the former. Easterly made a significant contribution to this debate by updating various cross-country measures of economic policy. This report provides an extended discussion of the Easterly paper using India as a case study. India conducted extensive economic liberalization in 1991, but economic growth (and productivity growth) in the 1990s showed no increase over rates in the 1980s. Where did all the growth go? This paper makes four criticisms of the Easterly paper. First, much of the original growth paradox highlighted by Easterly emerges from using non-rigorous before-and-after liberalization narratives and disappears when using a more rigorous body of empirical work. Second, even though India conducted extensive liberalization in 1991, the measures of policy reform used by Easterly fail to capture this reform effort. Third, while Easterly argued that the advent of good policy tends to be delayed, this paper uses the India case study to show that it is the growth payoff from good policy that is likely to be delayed. This is partly because economic liberalization needs complementary policies to be effective, it can have a significant impact at the firm level that takes time to show up at an aggregate, macro level, and liberalization is likely to have a J-curve impact on productivity. Fourth, Easterly’s finding that more rapid economic growth in the 1990s was associated with better economic policy is not very informative. Growth accelerations are widespread across time and space and are associated with various impulses, including but not limited to economic liberalization. The big question, with which Easterly does not engage, is whether this growth can be sustained. Thinking about the interaction between economic growth and institutions instead can allow us to better understand India’s economic growth since 1980.
About the Author(s)

Latest Posts

Follow & subscribe for updates.