The Elusive Quest for Growth

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The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics
Elusive Quest for Growth by William Easterly.jpg
Author William Easterly
LanguageEnglish
Subject Development Economics
Publisher MIT Press
Publication date
July 1, 2001
Pages400
ISBN 978-0-262-05065-4

The Elusive Quest For Growth: Economists’ Adventures and Misadventures in the Tropics is a 2001 book by World Bank development economist William Easterly. Upon its release, the book received acclaim from such figures as Bruce Bartlett, Robert Solow, and Paul Romer, and has since become widely cited in the Economic Development literature.

The World Bank is an international financial institution that provides loans to countries of the world for capital projects. It comprises two institutions: the International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA). The World Bank is a component of the World Bank Group.

William Easterly American development economist

William Russell Easterly is an American economist, specializing in economic development. He is a Professor of Economics at New York University, joint with Africa House, and Co-Director of NYU’s Development Research Institute. He is a Research Associate of NBER, senior fellow at the Bureau for Research and Economic Analysis of Development (BREAD) of Duke University, and a nonresident senior fellow at the Brookings Institution in Washington DC. Easterly is an associate editor of the Journal of Economic Growth.

Bruce Reeves Bartlett is an American historian whose area of expertise is supply-side economics. He served as a domestic policy adviser to Ronald Reagan and as a Treasury official under George H. W. Bush.

Contents

Easterly’s primary thesis is that the numerous efforts to remedy extreme poverty in the Third World have failed because they have neglected that individuals, businesses, governments, and donors respond to incentives. Thus, he argues, the failure of economic development in poor tropical nations is not the failure of economics, but the failure to apply economic principles to practical policy work. Inspired by the moral imperative to improve the lives of the poor, his recommendation is not to abandon the quest, but to improve the institutions of governments and international actors to create incentives that promote growth. [1]

Poverty state of one who lacks a certain amount of material possessions or money

Poverty is the scarcity or the lack of a certain (variant) amount of material possessions or money. Poverty is a multifaceted concept, which may include social, economic, and political elements. Absolute poverty, extreme poverty, or destitution refers to the complete lack of the means necessary to meet basic personal needs such as food, clothing and shelter.

Third World A term coined during the Cold War and for a while used to denote developing countries in general

During the Cold War, the Third World referred to the developing countries of Asia, Africa, and Latin America, the nations not aligned with either the First World or the Second World. This usage has become relatively rare due to the ending of the Cold War.

Panaceas that failed

The first section of the book is dedicated to the various Post-WWII efforts to promote economic growth among impoverished tropical nations. Early efforts to promote investment and capital accumulation were based on the Harrod-Domar Model, the Lewis Model, and Rostow's stages of growth, which proposed that GDP growth would always be proportional to the share of investment in GDP, and that capital accumulation was the critical factor for growth. These models justified huge amounts of aid from Western governments and intergovernmental organizations, to fill the “finance gap” between domestic savings and required investment. Easterly, however, demonstrates that most aid did not go into investment in the years 1965-1995, and finds no statistical association between investment and growth. As Robert Solow discovered in the late 1950s, it is not just investment in machines but investment in ever-improving machinery—technological progress—that improves worker productivity in the long-run.

In general, to invest is to distribute money in the expectation of some benefit in the future. For example, investment in durable goods, in real estate by the service industry, in factories for manufacturing, in product development, and in research and development. However, this article focuses specifically on investment in financial assets.

Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the form of profit, rent, interest, royalties or capital gains. The process of capital accumulation forms the basis of capitalism, and is one of the defining characteristics of a capitalist economic system.

Rostow's Stages of Economic Growth model is one of the major historical models of economic growth. It was published by American economist Walt Whitman Rostow in 1960. The model postulates that economic growth occurs in five basic stages, of varying length:

  1. Traditional society
  2. The Pre Conditions of take-off
  3. Take-off
  4. Drive to technological maturity
  5. High mass consumption

Easterly also discusses the failed efforts of states to use education, family planning, and debt forgiveness as means to grow out of poverty. He notes that there is little incentive for a student in a poor country to value and invest in her own education if there is no future return for that investment. In more corrupt countries the very skilled opt to apply themselves to lobbying the government and other activities that redistribute income rather than activities that create new value. For education to provide a return on the investment, the society must have well-functioning institutions and markets that foster a demand for skilled individuals.

Easterly also highlights the problematic nature of structural adjustment loan programs—aid given under certain conditions—which became very popular in the 1980s. Rather than initiating true economic reform, states only pretended to adjust their policies. Because shortfalls would elicit increased loans and donors demonstrated little interest in revoking aid, there was little incentive for states to improve their policies. Debt forgiveness regimes produced the same moral hazard, as authoritarian governments considered forgiveness as a free pass to continue to steal from their peoples’ futures. Easterly suggests that aid should be tied to prior achievement rather than promises of political leaders, and that aid should increase with further improvement (similar to the incentive structure of the Earned Income Tax Credit). [2]

Structural adjustment loan (SAL) is a type of loan to developing countries. It is the mechanism by which international financial institutions, such as the World Bank and International Monetary Fund, impose structural adjustment. They carry policy conditions, which have included:.

  1. Fiscal policy discipline;
  2. Redirection of public spending from subsidies toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
  3. Tax reforms which broaden the tax base and lower marginal tax rates, while minimizing dead weight loss and market distortions;
  4. Interest rates that are market determined and positive in real terms;
  5. Competitive exchange rates; devaluation of currency to stimulate exports;
  6. Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions ; any trade protection to be provided by low and relatively uniform tariffs; the conversion of import quotas to import tariffs;
  7. Liberalization of inward foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;
  10. Legal security for property rights.

In economics, moral hazard occurs when someone increases their exposure to risk when insured, especially when a person takes more risks because someone else bears the cost of those risks. A moral hazard may occur where the actions of one party may change to the detriment of another after a financial transaction has taken place.

People respond to incentives

The second section of the book outlines how the poor often do see incentives to invest in their futures. Bad luck, poverty traps, and corrupt governments plague individual efforts to overcome poverty. Easterly argues that "getting incentives right is not itself another new panacea for development. It is a principle that has to be implemented bit by bit, stripping away the encrusted layers of vested interests with the wrong incentives, giving entry to new people with the right incentives." [3]

An incentive is a contingent motivator. Traditional incentives are extrinsic motivators which reward actions to yield a desired outcome. The effectiveness of traditional incentives has changed as the needs of Western society have evolved. While the traditional incentive model is effective when there is a defined procedure and goal for a task, Western society started to require a higher volume of critical thinkers, so the traditional model became less effective. Institutions are now following a trend in implementing strategies that rely on intrinsic motivations rather than the extrinsic motivations that the traditional incentives foster.

Easterly writes that it is very difficult for poor individuals to break free from the poverty trap because of "knowledge leaks" and "knowledge matching". Knowledge yields external benefits to a society (in that an idea is worth more to a society the more knowledge exists in that society) and it is worth more when matched with others with similar expertise. This is an example of economies of agglomeration. When a society is full of knowledge and there are various fields of expertise, individuals have more incentive to invest in education. But if the society is bereft of knowledge, individuals face little incentive to invest, or if they do, will likely leave the economy in a brain drain. According to Easterly, governments can help overcome poverty traps by subsidizing investment in new knowledge, reducing taxes on capital goods and technology, and actively seeking private investment.

A poverty trap is a self-reinforcing mechanism which causes poverty to persist. If it persists from generation to generation, the effect can reinforce itself as a "cycle of poverty", if steps are not taken to break the trap.

Economies of agglomeration are cost savings arising from urban agglomeration, a major topic of urban economics. One aspect of agglomeration is that firms are often located near to each other. This concept relates to the idea of economies of scale and network effects.

According to Easterly, "the prime suspect for mucking up incentives is government." [4] High inflation, negative interest rates, black market premiums, high government budget deficits, restrictions on free trade, poor public services, corruption, and arbitrary enforcement of property rights lower the return on private investment and create poor incentives for growth. However, good government can promote broad and deep growth when it holds itself accountable and "energetically takes up the task of investing in collective goods like health, education, and the rule of law." Transparent institutions that promote these and other economic freedoms ultimately foster a productive society. [5]

Critical response

Reviews of The Elusive Quest for Growth appeared in the Journal of Economic Literature , [6] The Economist , Journal of International Affairs , Review of Radical Political Economics , and Development Policy Review. The Economist called it a "refreshing, iconoclastic book" which would leave its readers "chastened, instructed and entertained." [7] One critique emphasized that while incentives are tautologically critical to development, economists are far from agreement on how major policies, such as liberalizing capital flows and liberalizing labor markets, affect incentives. [8]

In the years following publication of Elusive Quest for Growth, Easterly became embroiled in a public debate with rival development economist Jeffrey Sachs over the role of foreign aid. [9] According to Abhijit Banerjee and Esther Duflo, Easterly has become one of the most influential anti-aid public figures, following the publication of two books, The Elusive Quest for Growth and The White Man's Burden." [10]

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Economic development is the process by which a nation improves the economic, political, and social well-being of its people. The term has been used frequently by economists, politicians, and others in the 20th and 21st centuries. The concept, however, has been in existence in the West for centuries. "Modernization, "westernization", and especially "industrialization" are other terms often used while discussing economic development. Economic development has a direct relationship with the environment and environmental issues. Economic development is very often confused with industrial development, even in some academic sources.

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Robert Solow American economist

Robert Merton Solow, GCIH, is an American economist, particularly known for his work on the theory of economic growth that culminated in the exogenous growth model named after him. He is currently Emeritus Institute Professor of Economics at the Massachusetts Institute of Technology, where he has been a professor since 1949. He was awarded the John Bates Clark Medal in 1961, the Nobel Memorial Prize in Economic Sciences in 1987, and the Presidential Medal of Freedom in 2014. Four of his PhD students, George Akerlof, Joseph Stiglitz, Peter Diamond and William Nordhaus later received Nobel Memorial Prizes in Economic Sciences in their own right.

International development wide concept concerning the level of development on an international scale

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References

  1. Easterly, William, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics, MIT Press, Cambridge, 2001, p.xiii
  2. Easterly, The Elusive Quest for Growth, p.21-140
  3. Easterly, The Elusive Quest for Growth, p.143
  4. Easterly, The Elusive Quest for Growth, p.217
  5. Easterly, The Elusive Quest for Growth, p.289
  6. Wacziarg, Romain (September 2002). "Review of Easterly's The Elusive Quest for Growth". Journal of Economic Literature . XL (3): 907–918. CiteSeerX   10.1.1.219.6533 . doi:10.1257/002205102760273823.
  7. "Growth and Aid: Abiding and Abetting". The Economist. March 28, 2002. Retrieved March 5, 2012.
  8. Koechlin, Tim, "Fighting Global Poverty, Three Ways," Review of Radical Political Economics, Volume 39 (2007): p. 381
  9. Easterly, William (March 13, 2005). "A Modest Proposal". The Washington Post. Retrieved March 5, 2012.
  10. Banerjee, Abhijit, and Esther Duflo, Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, Public Affairs, New York, 2011, p.3