Is Depression III possible?

Krugman argues that it is possible because of policy failure to spend more when spending is inadequate, leading to large unemployment and deflation. The earlier two depressions were the Long Depression (Panic of 1873 after years of deflation and instability) and the Great Depression (financial crisis of 1929-31 after years of mass unemployment).

"We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending. 

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy. 

I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times. 

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again." 

Industrial and trade policies as competitiveness policy

Reis and Farole argue that industrial and trade policies are here to stay, especially after the economic crisis, which decreased confidence in the market system (it has not wiped confidence completely; it should not. We just need to doubt some of the hyped virtues of markets). If government activism is here to stay then how can it promote competitiveness rather than resort to old-school industrial policy that accentuates import substitution policies. They explore areas where governments can use industrial and trade policies to enhance competitiveness of domestic firms.

First, how are we sure that there will be more government activism in the coming years. The authors point three reasons for active involvement of governments in implementing industrial policy and trade policy after the economic crisis.

1. The crisis has discredited some of the over-blown virtues of laissez-faire approach. Governments will be more active in designing policies to shape markets that the market itself would try to bypass.
2. Diversification of sectors, products, and trading partners will be top of the policy agenda in most of the developing countries, opening more room for government activism. Diversification lowers export-led growth volatility. Also, see this blog post.
3. Still, most of the developing countries’ products are not competitive in the international market despite sweeping liberalization since the 1980s. Governments would be designing policies to make their industrial products price and quality competitive.

Governments need to use industrial and trade policies in such a way that it fosters competition, not distort market incentives and diminish the gains from trade liberalization. They should play a critical role in overcoming market failures. Governments can help by ensuring the supply of inputs to private firms and creating a good functioning market environment where firms can operate. These policies can include facilitation of self-discovery (Hausmann & Rodrik 2002) and promotion (and realization) of the benefits of agglomeration economics (Porter 1990).

The authors argue that governments should focus on enhancing both macro (long term)- and micro-economic environment. Macroeconomic/long term environment include enhancing human capital, creating sound macroeconomic foundations, and instituting basic institutions such as property rights, the rule of law, and effective regulation. The microeconomic environment induce:

• Aligning micro incentives (removing tariff and nontariff barriers, real exchange rate misalignment, fiscal health, easy of doing business, etc.)
• Reducing trade-related costs (improving ICT services, improving capacity and coordination among government services, RTAs, improving logistic services constraints, reducing transportation costs, etc.)
• Overcoming government and market failures (promotion of technology creation and adoption, product certification standards, trade finance, SEZs, industrial clusters, etc.). The more effective the export-promotion agencies, the more will be the survival rate of the exporters (see the figure below) Export promotion agencies work but small and focused ones are better.

Brazil’s success with the green industrial policy is discussed here. Asia’s experience and their standing in 2030 discussed here. Justin Lin demystifies the Chinese miracle and export-led growth. Finland’s experience with industrial policy discussed here. Degol Hailu explains the developmental state in Indonesia. Industrial policy in the US after the crisis discussed here. Industrial policy ain’t protectionism. Jeff Madrick explains why government intervention works. Catch-up growth is facilitated by active government involvement. South Africa’s experience with electricity crisis and government activism discussed here.

Growth in developing countries after the economic crisis and the prospect for outward-oriented growth strategy discussed here. The use of industrial policy after the economic crisis by governments around the world discussed here. Indeed, industrial policy is back, argues Rodrik. Robert Wade on industrial policy here. Ha-Joon Chang calls for constructive debate on industrial policy.

A discussion of export-led growth and the growing importance of South-South trade here. More on the future of export-led growth here. Stiglitz on the role of governments here and here. The NAFTA’s achievement shows that trade policy does not necessarily mean development policy.

Economic discourse & accountability in Nepal

My latest op-ed/column is about the need for economic discourse and accountability in Nepal. There is a severe lack of discussion about economic issues. The way the economy is heading right now will define the way of life of the Nepalese people. The better the economy performs, the better will be the lives of the citizens.

The (uncertain, baffling, and ever-prolonging) political deliberations going on right now will mean nothing if the economy comes to a grinding halt or becomes dysfunctional. Since the people do not discuss economic issues as widely as it should have been, there is hardly any accountability. Furthermore, the talking heads and commentators rarely discuss these issues. They either do not understand what is going on or they can’t find experts to plainly explain what is going on in the economy. Hence, people do not judge political parties (including elected representatives) and their policies based on their pre-election commitment versus post-election delivery. More and more people need to discuss economic issues as they do with political issues.

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Economic Discourse & Accountability

The macroeconomic health of our economy is in a terrible shape. This dire warning is repeatedly trumpeted in the media and public sphere by politicians, economists, and commentators. Sadly, a majority of the population is unable to make much sense of it. Nevertheless, this issue will continue to pop up until we find a way to fix the Rs 22 billion hole in the country’s balance of payments (BoP), which basically is an accounting record of all the monetary transactions between Nepal and the rest of the world. Rather than incessantly drumbeat possible causes of the BoP crisis, let me discuss one issue rarely highlighted by talking heads and commentators: Economic accountability and its relation to our economic woes.

The gloomy economic conditions we are in right now are self-inflicted. It is a product of deficient as well as defective economic policies abetted by a political culture that is infected by corruption and a lack of accountability. With so much analysis and reporting going on about the BoP deficit, double-digit inflation rate and wobbly monetary situation, hardly any analyst has clearly explained how these economic conditions relate to a citizen’s consumption and living habits. How does it affect the lives and livelihoods of people residing in, say, Darchula, Rukum, Syangja, Sarlahi, and Solukhumbu? The failure to effectively convey this message has discouraged the public from actively discussing the very economic issues that will affect their lives and livelihoods in all possible ways. This is fostering a lack of accountability and scot-free pillaging of taxpayers’ rupees by the politicians.

Economic accountability is effective when citizens consciously demand one from their elected representatives. One way to induce this is through the dissemination of actionable analysis and interpretation of policies that can be easily comprehended by the public. The public demand for accountability is strong when they are aware of the way their tax rupees are spent by their leaders.

The people need to know how a particular economy policy to counter the BoP deficit would affect their disposable income, consumption, and livelihoods. If this is explained in plain language, then the people from all walks of lives will start discussing why the BoP crisis emerged in the first place. Then they will potentially start demanding explanations from their elected officials. The media, economic analysts and commentators could play a catalytic role in facilitating this process.

Unfortunately, the virtual absence of conversation about economic issues and the lack of demand for accountability by the public is a testament to the fact the media, analysts and commentators have not done an effective job in interpreting economic policies and conveying its impact on the citizens. For instance, there needs to be a wider discussion about the impact of land reform policy proposed by UCPN (Maoist), who wants to get away with private ownership of land and institute cooperative-style ownership. The people need to know how it will impact production, productivity, employment and economic growth.

Likewise, they also need to know if reverting back to import substituting policies, as recently suggested by Finance Minister Surendra Pandey, will help narrow the BoP deficit, or exacerbate it. Likewise, the public has to be furnished with answers to why they have to live under 54 hours of power cuts every week despite millions of rupees ‘invested’ in developing hydropower and in maintaining the bloated, inefficient bureaucracy of Nepal Electricity Authority. They also need to know why aid dollars and domestic tax rupees are wasted without any result in sight from the Melamchi Water Supply Project. The people need to know the impact of busting the real estate bubble in their lives and livelihoods. Moreover, they should be made aware of the costs of bandas, and its affect on their income and productivity.

The citizens should be explained the position of each political party on key economic issues. So far, no political party has clearly identified their core economic principles and policies, their intended policy prescriptions to the most pressing economic issues, and their strategy in kick-starting the jammed growth engine. If the public knows the position of each party on all major economic issues, then they will automatically judge the performance of their elected representatives on the basis of post-election achievement versus pre-election promises. There will be citizen-led pressure on the leaders to deliver results, not just empty promises.

The civil society and think tanks in Kathmandu have to do a better job in analyzing and explaining how a specific economic policy affects particular regions, industrial clusters, and livelihoods. The think tanks should play a vital role in stimulating discussion about the pros and cons of any economic policy before they are voted in the parliament. Meanwhile, the government needs to promote an open battle of ideas and ideals so that the final policy prescription is well analyzed by analysts and acceptable to a majority of the citizens.

The more discussion there is about economic policies at the policy level, in the media, and in the public sphere, the finer would be the eventual policy agendas. This would contribute a whole lot in terms of making our leaders accountable to the people. A failure to do so is already reflected in the inconsistent, incongruent, and impractical policies in the recently introduced Industrial Policy 2010.

To ensure economic accountability, there has to be an extensive discussion of economic issues in the public sphere. The media, analysts and commentators have to effectively break down the multidimensional impact of economic policies in the simplest form. This will help people associate economic policies with their lives, leading to exchange of ideas and ideals at individual, society, community and national levels. There is no better path to accountability than the one where citizens actively demand such from their elected representatives.

[Published in Republica,June 16, 2010, pp.7]

Keynesian perspectives last week

Krugman explains "That 30's Feeling": “Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession.”

Robert Skidelsky is not happy with the British government’s decision to slash spending and asks "Who governs?" : financial markets or government. “ These propositions are a re-run of the famous “Treasury view” of 1929. By contrast, Keynes argued that demand can fall short of supply, and that when this happened, government vice turned into virtue. In a slump, governments should increase, not reduce, their deficits to make up for the deficit in private spending. Any attempt by government to increase its saving (in other words, to balance its budget) would only worsen the slump. This was his “paradox of thrift”. The current stampede to thrift shows that the re-conversion to Keynes in the wake of the financial collapse of 2008 was only skin-deep: the first story remains deeply lodged in the minds of economists and politicians.”

Krugman wonders why Greenspan is regretting that deficits have not yet increased interest rates. Krugman explains: “deficits in the face of a liquidity trap don’t drive up interest rates and don’t cause inflation — lends credence to the Keynesian view.”

Export-led growth and volatility

How does export-led growth affect volatility? Here is an interesting discussion on this issue. There are four main mechanisms at play in the relationship between outward oriented growth strategy and volatility.

• Terms-of-trade volatility and output: TOT can directly affect output and growth. Decline in exports and export prices would severely affect balance of trade and revenues.
• Domestic market volatility and output: As export sector operates in tune with overseas market, domestic demand and supply shocks are less strongly correlated with output.
• Diversification and volatility: As countries diversify export items in tandem with more reach in overseas market, growth volatility decreases. More on this here.
• Specialization and volatility: Specialization in exports reduces growth volatility if the specializing and exporting nation is a high income one. The demand for their product is pretty much inelastic.

Policy lessons:

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“The stabilization effects of export product diversification are noticeably more consistent than that for export market diversification. This finding suggests that developing-country policymakers should emphasize measures that help broaden their countries’ manufacturing base, and expand the range of exportable products.

There are also a number of steps that governments can take domestically to help the private sector diversify its export base. Rather than protecting domestic producers with “infant-industry” tariffs—a classic inward-oriented strategy—policymakers can remove barriers to domestic market entry, and thereby encourage innovation and development of new markets by companies at home.

There is also strong evidence that better trade facilitation (that is, the reduction of fixed and variable costs associated with moving goods across borders) can be highly effective in promoting export diversification. Practical steps—such as the removal of red tape affecting exports and imports, and developing trade-related infrastructure and services—can make a major contribution to export diversification and help manage outward orientation.”

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Women in parliament and GDP per capita

It shows the ratio of female to male members in parliament with respect to GDP per capita. See Nepal (NPL) there, close to 50 percent despite low GDP per capita!

Source: Michael Clemens' presentation at ABCDE 2010 conference

Asia in 2030

At a time when the developed countries are bearing the burnt of economic crisis and an increasing market uncertainty due to mounting debt and deficit,  the Asian economies (save the very low income ones) are on a different track. They are helping in global growth recovery. Also, they have strong domestic demand and pretty resilient exports sector. If this trend continues, then Asia will be the largest economic region by 2030, according to Anoop Singh's piece in the latest Finance & Development magazine.

For this to happen, Singh argues, Asia needs to continue good policy reform and watch out for few issues thorny issues:

• Surge in capital flows need to be managed to prevent overheating and to decrease vulnerability
• Shocks in the developed countries might transmit to the Asian economies (exports decline and credit tightening)
• Needs to keep on building domestic demand to make it a main source of growth
• Strengthen social safety nets
• Development of national and regional infrastructure to reduce transportation costs and foster regional integration

The role of inventory adjustment in the Great Trade Collapse of 2008-09

This paper examines the role of inventories in the decline of production, trade, and expenditures in the US in the economic crisis of late 2008 and 2009. Empirically, we show that international trade declined more drastically than trade-weighted production or absorption and there was a sizeable inventory adjustment. This is most clearly evident for autos, the industry with the largest drop in trade. However, relative to the magnitude of the US downturn, these movements in trade are quite typical. We develop a two-country general equilibrium model with endogenous inventory holdings in response to frictions in domestic and foreign transactions costs. With more severe frictions on international transactions, in a downturn, the calibrated model shows a larger decline in output and an even larger decline in international trade, relative to a more standard model without inventories. The magnitudes of production, trade, and inventory responses are quantitatively similar to those observed in the current and previous US recessions.

For more see this paper.

The transformation of development thinking

David Lindauer and Lant Pritchett discuss the transformation of development thinking, development policy making, and the next big idea for growth. Though this is an old paper, it is quite interesting. May be they should update it considering the ideological shift economics fraternity has seen after the global economic crisis starting 2008.

How has the thinking on economic development changed after 2002 (and before 2008)? It might take different forms depending on several factors that affect the global and local markets. But one thing is certain: “The road to development is extremely complex, and the ultimate guide to that path must therefore be more complex than an arrow pointing confidently in one direction.”

Growth experience between 1980 and 2002:

• The enormous slowdown in growth that has occurred throughout the developing world: the so-called lost decade(s) in Latin America has its counterpart on other continents. The median growth rate in low- and middle-income economies fell from 2.5 percent in 1960–79 to 0.0 percent (zero!) in 1980–98.
• The long-awaited transition from stagnating Marxist central planning to a capitalist economy has gone horrifically worse than anyone would have dared predict. While the consensus was that the economies would experience a dip in income as they restructured and as resources were reallocated from old to new activities, no one predicted in 1992 that income in many newly capitalist countries in 2002 would be less than half the level under the Communists.
• The financial crises—or perhaps the single rolling financial crisis—of the 1990s: Mexico in 1994; Thailand, Korea, and Indonesia in 1997; Russia and Brazil in 1998; Ecuador in 1999; Turkey in 2000; and Argentina today. In each case, something caused a near or actual debt default or a large depreciation (or both).
• The collapse of sub-Saharan Africa, which has by now become so complete as to force itself into world consciousness. Nearly all of sub-Saharan Africa has been transformed from the heady optimism and enormous promise of early independence to almost unspeakable suffering. The only relatively consistent success cases—Botswana and Mauritius—do not give much hope for an entire continent. The AIDS crisis is so severe that the only historical analogue is the Black Death.
• The world’s two most populous countries, India and China, have grown rapidly. This is somewhat puzzling because in many ways these countries are slow, cautious reformers that remain among the more closed and restricted economies in the world. Both India and China accelerated by more than 2 percentage points, while the rest of the world decelerated by more than 2 percentage points.

This gives a mixed signal to what and what kind of political and economic system propel growth. So, what should be the agenda for post-Washington Consensus economic growth?

Lindauer and Pritchett argue that a new agenda should “acknowledge the complex, state-dependent, contingent relations between policies and growth.” While doing that there is also a need to recognized that growth regressions have failed to give a clear picture of the different growth experiences of similar and dissimilar countries.

The basic flaw in growth regressions is that they confuse partial correlations with (stable) parameters and confuse empirical variables(that might be associated with policies) with feasible actions to promote growth.

By now, there are thousands of papers that put economic growth on the left-hand side and other stuff on the right-hand side. This research produces empirical findings that are translated, more or less crudely, into policy recommendations: a partial correlation of lagged enrollment rates and subsequent growth is interpreted as proof that education is good for growth, which is then used as the basis for recommending more public spending on education; a partial correlation of trade and growth outcomes indicates that openness is good, which becomes a recommendation to reduce tariffs; a partial correlation of inflation and growth shows that low inflation is good, which leads to the adage that fiscal austerity will promote growth. Sadly, many of these recommendations have not worked in practice, in part because nearly all of the growth regression research is essentially irrelevant to policymaking and policy implementation. The findings do not constitute a credible basis for meaningful development advice, since they are not empirically stable and they are not about policy.

It is not surprising that growth regressions are unstable across countries and over time, because any model in which growth is linearly (or log-linearly) related to any given variable across countries, time periods, levels of development, and circumstances is almost certainly misspecified.

Even growth regressions with right handside variables under direct policy control—say, the budget deficit or tariffs— are still describing a relationship between policy actions and outcomes, not policies and outcomes. A policy is a mapping from states of the world to policy actions.

What is next after the terrible performance and use of growth regressions? They list some better ideas to study growth.

• A number of intriguing leads suggest future directions for research. One branch of such literature is episodic analysis, in which researchers examine episodes of more or less discrete changes in policy or intermediate outcome variables.
• A second approach is to examine economic growth directly, either to
  attempt a close reading of the factors that initiated a growth boom or bust or to undertake cross-sectional work explaining changes in growth rates.
• Although growth regressions are inherently hopeless, a few authors work from the growth partial correlations to plausible microeconomic mechanisms that explain the growth correlation, and then to the actual policy variables that could alter outcomes.

(They argue that economics profession does not need any new great idea in economic growth. It just needs to, as Rodrik says, “figure out how to turn sound economic thinking into useful, context-contingent policy recommendations.”)

For policy advice they propose a diagnostic tree of policy options. They branches they propose are (i) current level of income, (ii) current status of growth, (iii) linkages with the world economy, (iv) government strength, and (v) government capacity.

The Evolution of Agricultural Trade Flows

Earlier research showed that during the 1980s and 1990s most of the global agricultural trade expansion took place among the industrial countries and among countries within trade blocs. These were also periods of declining agricultural prices. These prices increased during the 2000s, there were continuous trade reforms, and many developing countries started to support their agricultural sectors. This paper analyzes trade flows during the past two decades, and tries to measure whether all these developments have changed the trade balances and the share of different groups within the global trade flows. In addition, it looks at the trade balances on food to see the impact of these changes on net food importing countries. In conclusion, unlike the case with manufacturing, developing countries have not been able to increase their export shares in agriculture as significantly. They have maintained their trade shares by primarily expanding exports to other developing countries.

A link to the full paper by Ataman Aksoy and Francis Ng here. The conclusion is not surprising!

No more isolated, finally!

Caption: Locals of Martadi in Bardiya welcome a tractor that reached the district headquarters for the first time on Wednesday. With the road network touching Martadi, all district headquarters in the far-western region of Nepal now have road connectivity. (Source: Republica, June 10, 2010)

It is never too late. Now, five (or four) districts headquarters are left to be connected by roads. After connecting district headquarters, the next public investment should be in expansion of roads within districts so that villages are connected each other. One of the few sectors where donor’s money is making some headway in Nepal!

Clustering in market-institution-deficient markets

Rural nonfarm development plays a key role in generating employment in many developing countries. Clustering is an important form of industrial organization in the rural nonfarm sector. Based on a primary survey of both urban and rural handloom weaver clusters in Ethiopia, one of the country’s most important rural nonfarm sectors, this paper examines the mechanism and performance of clustering. That cluster-based handloom production survives even in remote rural areas illustrates its vitality in restricted environments. In the absence of financial institutions, clustered producers set up interconnected trade credit linkages to ease working capital constraints. Moreover, geographical clustering enables entrepreneurs with limited capital to enter the business through shared workspaces and fine division of labor. Despite the viability of the clustering model of production operating in harsh environments, an improvement in infrastructure can further enhance firm performance in a cluster. Our survey indicates that producers in electrified towns work longer hours than those in towns without electricity. In addition, the rental cost of shared lit workspaces is minimal, attracting more poor entrepreneurs to participate in handloom production than would otherwise be possible.

This one comes from a case study of handloom weavers in Ethiopia. Pretty interesting how people find alternatives way to transact and interact in no-so-perfect markets. An external policy and investment shock such as infrastructure construction improves productivity. More here.

What is disastrous in the short run: Inflation or Deflation?

The consensus among economists is that deflation is disastrous in the short-run but the fear of inflation is legitimate in the long run. We need more (prudent) Keynesian dosage in the economy!

The rough consensus was that in the near term, as Western economies struggle to recover, the bigger worry there is deflation. But as the time horizon lengthened, more experts cited inflation, because it seems the most plausible exit strategy for governments trying to deal with crushing debts.

Using monetary policy to generate the growth necessary to push inflation much above 2% would be difficult, since short-term interest rates are already below 1%. Fiscal policy is turning contractionary as America’s stimulus expires and much of Europe implements austerity measures.

Monetarists downplay the output gap and focus instead on the vast amount of money that has been created as central banks buy bonds or extend loans to banks. They worry that this money, which today is largely being hoarded by the financial industry, will eventually be loaned out into the real economy, prompting prices to rise. Yet this concern is probably overblown.

After all, central banks can still raise interest rates, no matter how big the monetary base is, and they also have ways of withdrawing the exceptional liquidity measures put in place during the crisis. The European Central Bank successfully “sterilised” its recent purchase of government bonds by enticing banks to deposit an offsetting amount of money with the central bank. The Federal Reserve will start testing a similar system on June 14th.

Even if inflation could be created, would it reduce the real government debt, the presumed purpose of such a policy? Not easily. First, for most countries the greatest long-term fiscal threat comes from unfunded retiree benefits, which by their nature are indexed to inflation. Second, the maturity profile of most countries’ marketable government debt is relatively short: over half of America’s and more than 40% of that of Germany, France and Italy matures within three years. Britain, at 20%, is the exception. This means that unless investors are repeatedly surprised, inflation will lead to higher nominal interest rates as debt is refinanced, and in turn to an unchanged real debt. If governments set out to create inflation, investors are likely to notice and react.

The latest crisis has demonstrated that price stability is no guarantee of financial and economic stability—indeed, a narrow obsession with prices may have led central bankers to neglect asset bubbles and the condition of the banks. Yet in practice price stability has not been dislodged from the centre of central banks’ attention.

RTAs are a blessing

Freund and Ornelas argue (full paper here) that regional trade agreements (RTAs) are more of a blessing than a burden. This runs counter to Jagdish Bhagwati’s argument that RTAs undermine free trade. They find that trade creation tends to be the norm in RTAs, which counts to nearly 300 now, and trade diversion an exception; and when trade diversion is observed, its magnitude is relatively small.

It means that there is more trade creation than trade diversion with RTAs.Why so? They argue that it is because governments choose partners well considering factors such as proximity, similarity in GDP and its composition, and difference in factor endowments. Moreover, RTA partners not only lower tariffs on trade between/among them but also lower tariffs on  imports from countries outside the bloc. In fact, RTAs go beyond the mandate of trade liberalization among the partners.

The RTA creates “leakage” in the trade-policy redistributive channel. External protection also becomes more costly, because of the costly trade diversion that accompanies the RTA. As a result, external tariffs tend to fall after the formation of an RTA, both because the economic marginal cost of external protection rises and because the political-economy marginal gain from external protection falls.

[…] The increasing wave of regionalism has been largely beneficial to the world trading system. Most empirical analyses indicate that trade creation, not trade diversion, is the norm, both because governments choose well when forming RTAs and because they adjust other trade policies to moderate the distortions from discrimination.

Here is a list of RTAs so far. More on RTAs here.

From Governance to Growth

This note introduces an evolutionary approach to economic and governance reform. It lays out two especially prevalent trajectories that differ starkly from one another in how they prioritize and sequence economic growth, state building, and the development of civil society and political institutions. The first trajectory focuses initially on investments in state capacity. The second initially prioritizes smaller, more catalytic entry points and addresses specific capacity and institutional constraints as and when they become binding. Over the longer term, both trajectories endogenously generate incentives to strengthen institutions that underpin economic competition and political accountability. But over the short to medium term, the strengths of one trajectory are mirrored as the weakness of the other. For many low-income countries, the combination of rapid growth plus a seeming excess of either order or chaos may thus be in the (medium-term) nature of things, rather than an aberration that requires fixing. 

See more on Brian Levy's Development trajectories: An evolutionary approach to integrating governance and growth