My article last week, ‘The importance of nurturing institutions for a resilient Jamaica’, mentioned a past interview with Inter-American Development Bank (IDB) economists Diether W Beuermann and Moises J Schwartz about their book, Nurturing Institutions for a Resilient Caribbean. I noted their book was endorsed by Massachusetts Institute of Technology’s (MIT) Daron Acemoglu and Chicago’s James Robinson – authors of Why Nations Fail: The Origins of Power, Prosperity and Poverty.

As luck would have it, both authors, along with their co-author, Professor Simon Johnson, have just been awarded the Nobel Prize in economics for their work on the importance of institutions.

In a 2021 Mckinsey interview, Acemoglu defined the key thesis of his research as extractive political and economic institutions which concentrate power in the hands of a small elite, with political institutions very often bolstering the power of extractive economic institutions. An extreme example was slavery, but these types of institutions have been common to nearly all societies before the Industrial Revolution.

He argues that sometimes the elites allow some growth, but it is not sustainable, innovation-based growth that will drive long-term productivity and broad-based prosperity.

Inclusive institutions are the opposite, creating broad-based opportunities to enter into business or new professions. This is much more conducive to long-run productivity growth due to the experimentation, innovation, and creative destruction necessary for true technological progress. Despite its issues over time, the US is an example of an inclusive nation, with active political participation by a large fraction of the population and an open system. For example, anyone can become a software engineer.

As a counterpoint to the “institutions view”, my 2010 Jamaica Observer article, ‘Why can’t Jamaica grow? Lessons from Barbados’, on a joint seminar put on by the Caribbean Policy Research Institute (CaPRI) and the world-renowned Stanford Graduate School of Business, leading Jamaican academic Peter Blair Henry and his former Stanford colleague Conrad Miller presented a paper titled ‘Institutions verses Policies: A Tale of Two Islands’.

The paper notes that both Barbados and Jamaica inherited the two institutional characteristics that the literature on growth identifies as critical to long-run prosperity, namely “strong constitutional protection of private property and English common law”. However, despite a similar small-island economic base, they experienced “starkly different growth trajectories in the aftermath of Independence. From 1960 to 2002 Barbados’ gross domestic product (GDP) per capita grew roughly three times as fast as Jamaica’s. Consequently, the income gap between Barbados and Jamaica is now almost five times larger than at the time of Independence”.

Henry argued that since their property rights and legal systems are virtually identical, recent theories of development cannot explain the divergence between Barbados and Jamaica. The paper posits that differences in macroeconomic policy choices, not differences in institutions, must, therefore, account for the differing growth experiences of these two Caribbean nations.

The authors argued that “countries have no control over their geographic location, colonial heritage, or legal origin, but they do have agency over the policies that they implement. Of particular importance for small, open economies is the response of policy to macroeconomic shocks, such as a fall in the terms of trade.

Pedestrian as it may seem, changes in policy, even those that do not have a permanent effect on growth rates of GDP per capita, can have a significant impact on a country’s standard of living within a single generation.

At the same conference, perhaps unsurprisingly, Dr Damien King appeared to best reflect the importance of the institutions’ view. Noting the inherent tension in determining the importance of policy and institutions, he argued “institutions persist” and are often legacies of “two to three hundred years ago”, arguing that just looking at the endowment of the political systems was not convincing.

In his view, in line with the work of Acemoglu et al, a promising line of thought was that Jamaica had been set up as a “colony of exploitation”, with a high degree of absentee land ownership and the resultant inequality, whilst Barbados had a much greater degree of European settlement and, therefore, more participation in governing structures from the very beginning. This difference may account for why Jamaica has run fiscal deficits every year except for six since Independence, whilst in Barbados budgets have been much more balanced.

At the same conference Dr Susan Collins, now head of the Boston Federal Reserve and a member of the US Federal Reserve board, gave perhaps the most balanced view. Dr Collins, who has a Jamaican background, argued that the puzzle that needed to be answered was: Why do poor economic polices persist given good political institutions? She was presumably referring to our initial constitutional endowment. She argued that our growth outcome was a complex interplay of initial conditions, policy choices, luck, and leadership.

She noted Jamaica’s particularly poor showing in the 2008 World Bank governance indicators in the Rule of Law category, which was well below the Caribbean average and even further below that of Barbados, and theorised that we would have started at a roughly equal level post-Independence. She argued the particular importance of increasing total factor productivity, which goes beyond simply adding capital or workers to incorporate the intangibles of knowledge and technology in growth performance. a key element in the World Bank’s World Development report launched this Thursday in Jamaica.

The report emphasises new work on Schumpeterian “creative destruction”, in line with an inclusive economy escaping the so-called middle income trap in which Jamaica seems to be caught.

Supporting Collins’ view, at yesterday’s Jamaica Chamber of Commerce Business and Consumer confidence survey event, by far and away the biggest issue for both businesses and consumers was crime. Development Bank of Jamaica Chairman Paul Scott, after noting the critical importance of protecting institutions such as our independent central bank, emphasised the enormous damage crime has had on productivity in Jamaica as well as the need for labour market reform as our population stagnates.

Keith Collister has been a member of the Jamaica Chamber of Commerce Economic Affairs and Taxation Committee for 24 years, and is its current chair. He has also been a member of the Private Sector Organisation of Jamaica Economic Policy Committee for the same time.

Keith Collister.