Earlier this week, I posted an interview with Cornell’s Dr. Robert Frank, who believes that government intervention is the best way out of an economic slump. While a few readers left comments supportive of Frank’s ideas, the majority strongly felt that the less government involves itself with business, the better. These readers may be interested in recent research from Stanford that supports their point of view.
Stanford Graduate School of Business economist Peter Henry and Stanford student Conrad Miller studied the islands Barbados and Jamaica in the aftermath of their independence. They concluded that a government’s economic policies determine a country’s success or failure more so than its laws and institutions.
The research, which is forthcoming in The American Economic Review, states that when Jamaica and Barbados achieved independence in the 1960s, both countries were run according to English common law, with private property granted strong constitutional protection.
However, despite their similar laws and institutions, Barbados’ per capita gross domestic product grew three times faster than that of Jamaica. The research found that the income gap between the two countries is now five time larger than it was at the time of independence.
Why Barbados succeeded
So what brought about the discrepancy? Both countries experienced economic slowdown in the 1970s, but they responded to it in markedly different ways. Jamaica’s government intervened in the economy to a large extent, ran up large fiscal deficits, nationalized companies and raised tariffs.
Barbados took the opposite approach, minimizing state ownership and implementing a growth strategy that limited government spending, which the research finds ultimately led to their greater economic success.
What can we learn from Barbados and Jamaica?
“In comparing the case of Jamaica and Barbados, it’s pretty clear that protectionist policies really hurt a country’s economy in the long run,” Henry says.
While Henry believes that governments must play an interim role in restoring the health of the financial sector, “extensive and ongoing government intervention in markets — along with the protectionist sentiment that it is likely to arouse — has the potential to cause many more problems than it solves.”
It is my hope that by running both the views of Dr. Frank and Dr. Henry in the same week that the intention of this blog becomes clearer. Back to B-school is not meant to display a politically liberal or conservative bent, but to alert the business community to the variety of research and views coming out of business schools and give readers a forum in which to engage in debate about those issues. As always, I look forward to hearing your thoughts.
Barbados flag image courtesy of Flickr user Hanumann, CC 2.0
