Many analysts actually believe that several emerging market countries are already at this point. As such, moving forward will be possible only with further institutional reforms. Such a sentiment is echoed in former premier Wen Jiabao’s description of China’s impressive growth performance as “unstable, unbalanced, uncoordinated, and unsustainable”. So we know, by and large, what is needed. Indeed, economists have done a very good job at explaining the importance of institutions for growth. But how do we achieve institutional change? Why do some countries manage to improve their fundamental capabilities while others languish? This is the heart of the matter. It is not hard to spot bad institutions when we see it and propose changes that would seemingly yield large benefits. It is another issue entirely how to make the change happen. In this regard, policy prescriptions that call for “growth enhancing structural reforms” or “strong institutions” alone is partial at best. That’s like saying that if you want to get fit, you should exercise. Good advice, but not very useful. A practical reform strategy must be based on a ground-level perspective of how institutional change happens. Policy can then be tailored to maximize the chance of success. So how does institutional change happen? The answer seems to be a mixture of history, will power, and luck. It relates to the complex power dynamics in a country. Structural reforms create winners and losers. The winners are often diffused and dispersed. Conversely, the losers are often easily identifiable, powerful and well-organised.

In fact, this was precisely one of the key drivers of Thailand’s growth in the 20 years prior to the 1997 crisis. During this time, the share of employment in agriculture fell by a third, releasing workers to the more productive manufacturing and service sectors. Thailand’s experience is quite typical of many others in Asia. Emerging market countries have not only grown rapidly over the last few decades, they have also changed dramatically. Sustaining growth going forward hinges on the continuation of this process of change and upgrading. For Asia, industrializing the agriculture sector through the adoption of modern methods and the development of agribusinesses will be a key source of productivity growth. Similarly, the composition of the service sector, which is also quite large, has to shift from low-productivity activities to modern, high value-added services. Countries that have achieved sustained growth are those that are better at removing the bottlenecks that impede such transformation. This typically requires a number of key fundamental capabilities, such as macroeconomic stability, rule of law, good education, strict enforcement of contracts, a competent bureaucracy, good governance, and low tolerance of corruption. These are often encapsulated under the rubric of strong institutions. One can think of institutions as the set of rules and norms that both governs the incentives of economic agents as well as constrains their behavior. Good institutions encourage growth, bad institutions stifle it. Entrepreneurship, a critical driver of structural change, relies heavily on the institutional environment.