An Evolutionary Theory of Economic Policy. Part II: The Necessity of Timely Switching

Abstract

This is the second part (first part: Voprosy Ekonomiki, 2006, No 7) of the work on how economic policy of a developing country should change as it approaches the level of developed economies in terms of welfare (GDP per capita) and the quality of institutions. We focus on the impact of several policies to promote the catch up development: the speed of foreign exchange reserves accumulation ("exchange rate protectionism"); import tariffs; measures to attract foreign direct investment; import of technology versus indigenous R&D; regulation of migration and measures to support large versus small enterprises. The econometric analysis of the data on over 200 countries in 1975-1999 shows that the impact of these policies may be positive or negative depending on a stage of development; in each case we find threshold levels or critical combinations of GDP per capita and/or an institutional quality indicator. Thus, there is additional evidence to support the conclusions made in the first part of the article and based on the analysis of the evolution of economic policies in the Western countries and in the countries of successful catch up development ("economic miracles").