WWID: Recognizing high dimensionality

In Chapter 6 of What Works in Development, Ricardo Hausmann makes, in commentator Ross Levine’s words, an “imaginative, provocative, and substantive” argument that much work on economic growth willfully ignores the complexity inherent in the classical development formula (“peace, easy taxes, and justice” in Adam Smith’s words, or trade openness, sound finances, and property rights, to paraphrase Larry Summers). Providing the right public inputs, particularly regulation, to enable a nation to develop new productive capabilities is a very “high dimensional” problem, which Hausmann compellingly illustrates with the myriad policy elements required to enable an efficient real estate market.

The necessary information to determine optimal policies is highly dispersed, Hausmann continues, and in such a context central planning is bound to fail. Unlike a product market, the market for public inputs lacks mechanisms to aggregate information (prices), incentivize action (profits), and allocate resources (capital markets). Hausmann then hypothesizes that in the United States, the open political architecture allows lobbyists may play a market-making role in the provision of public inputs. (Not without some rent-seeking, of course, but this is a necessary tension “in the absence of an omniscient and benevolent social planner.”)

How, then, to incorporate broad input into the provision of public inputs in developing countries? He doesn’t have all of the answers, and neither do commentators Nava Ashraf (who suggests looking to social enterprise for systems) and Levine (who uses the example of racism to argue that institutions themselves evolve in response to underlying incentives, and their change cannot be mandated independently of those incentives). But I find the question alone quite profound.

Very interesting stuff… I will have to let it marinate for a while, and hope to have further reflections at some point.

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