"Innovations in Governance"
Innovation Policy and the Economy, vol. 11
Editor(s): Josh Lerner and Scott Stern
© University of Chicago and NBER, March 2011
Publication type: Chapter
Innovation is usually framed in terms of paradigm-shifting scientific discoveries and technological applications. Indeed, in a world with scarce resources, it's also critical to staying one step ahead of diminishing returns in boosting incomes and human welfare (Romer, 1990). Yet much of the world is so far from any technological frontier that income gains for most are driven by accumulation of capital (both human and physical) rather than pioneering inventions (Mankiw, Romer, and Weil, 1992).
This then begs the question of why some nations accumulate capital, while others remain mired in poverty. The proximate answer is that some countries have better rules — the norms and laws that govern how people interact — for promoting investment and growth. Of course, there are many rules that achieve this same end. Commercial agreements may be enforced through social sanction or court of law. Laws may be followed for fear of prison time or because of norms of behavior. Unless a society develops rules that promote contract enforcement and rule of law, people won't invest, fearing theft or destruction of the fruits of their labor; economic stagnation ensues.
In this paper we explore the innovations that have led to better rules for promoting investment and growth. Some policymakers have tinkered with their country's institutions, some have undertaken wholesale changes, while others have attempted to influence the rules in other countries. While our survey of noteworthy innovations in governance is drawn from disparate countries with varying circumstances, we attempt to synthesize their lessons into a set of consistent advice. Governments can encourage capital accumulation and growth by developing policies that adhere to a common set of principles — competitive pressures, free flow of information, trade in ideas and technologies, and a focus on shifting norms and culture.
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