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  5. The Baker Hypothesis: Stabilization, Structural Reforms, and Economic Growth

Journal of Economic Perspectives

ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)

The Baker Hypothesis: Stabilization, Structural Reforms, and Economic Growth

  • Anusha Chari
  • Peter Blair Henry
  • Hector Reyes
Journal of Economic Perspectives
vol. 35, no. 3, Summer 2021
(pp. 83–108)
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Abstract

In 1985, James A. Baker III's "Program for Sustained Growth" proposed a set of economic policy reforms including, inflation stabilization, trade liberalization, greater openness to foreign investment, and privatization, that he believed would lead to faster growth in countries then known as the Third World, but now categorized as emerging and developing economies (EMDEs). A country-specific, time-series assessment of the reform process reveals three clear facts. First, in the ten-year period after stabilizing high inflation, the average growth rate of real GDP in EMDEs is 2.6 percentage points higher than in the prior ten-year period. Second, the corresponding growth increase for trade liberalization episodes is 2.66 percentage points. Third, in the decade after opening their capital markets to foreign equity investment, the spread between EMDEs average cost of equity capital and that of the US declines by 240 basis points. The impact of privatization is less straightforward to assess, but taken together, the three central facts of reform provide empirical support for the Baker Hypothesis and suggest a simple neoclassical interpretation of the unprecedented increase in growth that has taken place in EMDEs since the early 1990s.

Citation

Chari, Anusha, Peter Blair Henry, and Hector Reyes. 2021. "The Baker Hypothesis: Stabilization, Structural Reforms, and Economic Growth." Journal of Economic Perspectives 35 (3): 83–108. DOI: 10.1257/jep.35.3.83

Additional Materials

JEL Classification

  • E23 Macroeconomics: Production
  • E31 Price Level; Inflation; Deflation
  • E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
  • F13 Trade Policy; International Trade Organizations
  • L33 Comparison of Public and Private Enterprises and Nonprofit Institutions; Privatization; Contracting Out
  • O24 Development Planning and Policy: Trade Policy; Factor Movement; Foreign Exchange Policy
  • O47 Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence