The Growth Diamond
ADMS1010 – Summer 2012 – Troy Young
Reading – Stern Diamond – May 10 2012
What is the Growth Diamond and Why is it Important?
- Financial repression, severe underdevelopment of financial intermediaries and
markets, can stymie growth and that financial development paves the way for
o The reason: by reducing asymmetric information and tapping economies
of scale (and scope), the financial system efficiently links investors to
entrepreneurs, ensuring that society’s scarce resources are allocated to
their highest valued uses and that innovative ideas get a fair trial.
- In the growth diamond, home plate is represented by government, first base by
the financial system, second base by entrepreneurs, and third base by
o To succeed economically, in ‘The Growth Diamond’, a country must first
possess a solid home plate, a government that at a minimum protects the
lives, liberty, and property of its citizens.
o Next, it must develop an efficient financial system capable of linking
savers/investors to people with good business ideas, the entrepreneurs at
o The managers at third take over after a product has emerged and
- The ‘Growth Diamond’ is a powerful model because it can be applied to almost
every country on Earth.
o The poorest countries never left home plate because their governments
killed and robbed their citizens.
o Poor but not destitute countries never made it to first base, often because
their governments, while not outright predatory, restricted economic liberty
to the point that financiers and entrepreneurs could not thrive.
In many such countries, the financial system is the tool of the
government (indeed many banks in poor countries are owned by
the state outright)