Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India
CESifo Economic Studies 54(3), 2008, pages 325-357
In this article, I discuss some recent research in the area of economic growth and development emphasizing the endogenous dynamics of policies and organizational forms in a world characterized by credit-market and labor-market imperfections. I present a simple model of technological convergence featuring an endogenous evolution of contractual arrangements. The key assumption is that economic growth is associated with investments as well as with the adoption and imitation of existing technologies in economies lying far from the technology frontier. In contrast, growth is increasingly driven by innovation as economies approach the technological frontier. The theory predicts that contractual arrangements evolve and adapt spontaneously to the changing needs of technological progress. However, this evolution is neither necessary nor serendipitous. Economies that fail to introduce economic reforms as they advance may become stuck in non-convergence traps. I discuss a number of empirical applications, including the wave of reforms of industrial policy in India in the 1980s and 1990s.