People in Economics
Maureen Burke profiles Peter Blair Henry
As a child in Jamaica, Peter Blair Henry would watch in quiet puzzlement as a woman from the neighborhood came to his grandmother’s gate from time to time, asking for food. He wondered why his family always had enough to eat while this woman, with her matted hair and distended belly, did not.
This contrast between the haves and the have-nots became even starker a few years later, when Henry emigrated with his parents to the United States, landing in the comfortable Chicago suburb of Wilmette. Seeing only affluence around him, the nine-year-old Henry was deeply stirred by the fact that people were so much better off in the United States than they were back home. This fundamental question of development—why standards of living vary from country to country and what can be done about it—has been a “personal obsession” ever since, Henry says.
Now dean of the Leonard N. Stern School of Business at New York University (NYU) in the heart of New York City, Henry has come a long way from the rural Jamaica of his youth.
Striding into NYU’s Henry Kaufman Management Center across the street from Washington Square Park on a beautiful fall morning, he displays an easy rapport with security guards, students, and professors alike. As he passes through the lobby, he eschews the elevator and takes the stairs to his office instead. All 10 flights.
Institutions versus policies
The youngest dean in the Stern School’s 113-year history, Henry, 44, has devoted much of his career to studying the impact of economic reform on the lives of people in developing countries. His research has sometimes challenged conventional wisdom—whether on debt relief, international capital flows, or the role of institutions in economic growth.
His study “Institutions versus Policies: A Tale of Two Islands,” coauthored in 2009 with Conrad Miller, is a good example.
The study chronicled the widely divergent economic performance of Barbados and Jamaica. “It may be tempting for readers to regard this paper as a quaint tale of two exotic islands better known for their beaches, music, and Olympic sprinters than their significance in the global economy,” the authors write. “On the contrary, we think that important general lessons lie at the heart of this Caribbean parable.”
“A Tale of Two Islands” set out to disprove the hypothesis that institutions play the decisive role in a country’s development. That theory—advanced, among others, by economists Daron Acemoglu, James Robinson, and Simon Johnson in a 2000 paper—holds that prosperity is created by incentives, and incentives are created by institutions. In 2012, Acemoglu and Robinson developed that premise at length in a best-selling and highly acclaimed book Why Nations Fail: The Origins of Power, Prosperity, and Poverty.
Henry and Miller, both then at Stanford University, challenge this view, making the case that policies—not institutions, geography, or culture—are the determining factor in why some countries are rich and others poor. Comparing Barbados and Jamaica, two former British colonies that inherited almost identical political, economic, and legal institutions, they argue that the sharp divergence in the two countries’ standards of living was attributable to something else—namely, the government’s economic policy choices.
The former colonies followed widely divergent paths in the 40-year period following their independence in the early 1960s. The Jamaican government during the 1970s and 1980s ran large budget deficits, restricted international trade, and intervened extensively in the economy. By contrast, Barbados achieved fiscal discipline, kept state ownership to a minimum, and embraced open markets.
The result is striking. In 1960, real income per capita was $3,395 in Barbados and $2,208 in Jamaica. Today, the picture looks far different. Barbados is much wealthier than Jamaica, with income per capita of $15,198 compared with $5,358.
“Henry and Miller are, of course, right that one should pay attention to the independent effects of macroeconomic policies,” wrote Acemoglu and Robinson recently in their blog. “But economic policies don’t just drop out of the blue. They are chosen by governments and politicians whose incentives are determined by political institutions.” So the argument that policies but not institutions distinguish Jamaica from Barbados is not compelling, they say.