Trial by Crisis

WARSAW – Episodes like the current financial crisis seriously disrupt economic growth. But the question that we should be asking concerns such episodes’ impact on longer-term development. And that question has attracted surprisingly little interest.

Traditional growth theories focus on systematic forces – for example, capital accumulation, employment, and technical change – that, by definition, operate all the time, although with varying degrees of intensity. Some theories also consider underlying institutional factors like property rights, market competition, tax and regulatory burdens, and the level of the rule of law.

Another strand of research deals with crisis management, but without examining the impact on longer-term growth. In the case of a financial crisis, this usually includes fiscal and monetary easing, as well as rescue operations for larger financial institutions. The prevailing approach to crisis management has been short-term, and, as was amply demonstrated during this latest crisis, is based on what I call the self-justifying doctrine of intervention.

This doctrine holds that, just as one should never worry about pouring too much water on a fire, whatever crisis-management measures are adopted are justified, because the alternatives would have been worse and might well have provoked catastrophe and/or a meltdown of financial markets.