What's the Big Idea?: The Third Generation of Policies for Economic Growth
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Economia 3.1 (2002) 1-39

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What's the Big Idea?
The Third Generation of Policies for Economic Growth

David L. Lindauer
Lant Pritchett


Economists and reform minded policymakers in Latin America are asking themselves, and are being asked, hard questions these days. The broad consensus is that two decades of reform have had too little to show for it. Sporadic and sputtering economic growth and stagnant real wages (especially for the unskilled) is not what was expected. This paper puts the Latin American experience in the global context and examines the processes that brought the region to this point. We look at the trends in policy advice on economic growth and how they were formed, and we address the question of what economists can do now to help the region move in restoring economic growth.

The Best and the Brightest

Imagine that you are an American and that it is 1962. You only know what you could have known in 1962. You are called on by an energetic young president to design a program to promote economic growth in Latin America. Perhaps you are a professional economist or perhaps simply an informed, savvy observer of the international and economic arenas. 1 What are the big economic facts of your lifetime that shape your views?

When you were in your thirties, you would have experienced the Great Depression. You would therefore know for a fact that a capitalist economy is unstable: stock markets can and do crash, unregulated banks fail, and unemployment can soar to very high levels and stay there. Whether or not [End Page 1] you believe activist government responses are effective, you know they are popular—the architect of those policies won four of the first six presidential elections of your life.

You would also have witnessed the amazing ability of a war economy to mobilize production. In 1939 output in the United States was barely above its predepression levels. That year only 355 locomotives were produced, but six years later 3,213 rolled off the assembly line. In 1939, 24,000 truck trailers were delivered, compared with 209,000 in 1944. Between January 1940 and December 1945, the U.S. Army procured 231,099 aircraft (roughly 40,000 a year, from a base of almost none); 88,410 tanks; 46,706 motor carriages for self-propelled weapons; 113,967 other combat vehicles; and over 20 million guns and rifles. 2 No one who lived through World War II could question the idea that governments can plan, mobilize, and direct enormous expansions in economic activity.

You would have seen Russia transformed from a politically and socially backward country convulsed by revolution, civil war, and famine into the Soviet Union, which against all odds grew into an industrial power with military might. It defeated Germany in World War II. Only last year, in 1961, the Soviet Union stunned the United States out of its complacency about being the world's technological leader by putting the first man into space. You would therefore know for a fact that socialism and central planning are capable of rapidly transforming a country from an agrarian backwater into an industrialized superpower.

You also observed the ascendancy of Japan. Although you would have been too young to remember the world's shock at the defeat of the Russians at Port Arthur in 1905, you would have witnessed the rise of Japan to the point at which it could conquer China and nearly all of East Asia. The rapid collapse of the British and Dutch armies would have destroyed any notions of inherent Western superiority. You would be aware that the Japanese can attack and credibly threaten the United States. You know for a fact that with aggressive national leadership, a poor, non-European country can grow very rapidly.

You would have witnessed the dramatic recovery of the industrialized world following an economically devastating war. The countries of Europe, supported by generous aid from the Marshall Plan, launched a [End Page 2] recovery that generated growth rates...