The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics

The Elusive Quest for Growth, by Bill Easterly, a senior advisor in the research department of the World Bank, is a must read for anyone interested in global development. Its appeal lies in its unprecedented reach and candor in surveying the assumptions and theories underlying the development assistance provided by richer countries and international agencies to poorer countries. Easterly's conclusion is that the emperor (the international aid industry) has almost no clothes. While one can quibble with the specifics of some of his analysis, the overall effect is a compelling, authoritative book that makes it impossible to avoid facing the fact that the current aid framework needs a radical overhaul. The aid industry has spent about 1 trillion dollars over the last forty years, and the returns have been disappointing. Fortunately, Easterly points the way toward the beginning of a new wardrobe. There's bad news and good news. The bad news is that nearly all of the theories that drive the design of aid programs are not borne out by the experience to date. Most fundamentally, the formal mathematical models underlying the macroeconomic analyses of organizations such as the World Bank and IMF are built on two plausible but wrong assumptions. The first of these is that investment drives growth. Unfortunately, the record shows that investment only drives growth in those few cases where it is made in conjunction with appropriate technology, know-how, and a sound overall economic policy environment. The second wrong assumption is that aid increases investment. Extensive analysis indicates that most governments simply consume rather than invest the aid they receive. The striking thing about these two faulty pillars of the development paradigm is that even the best aid organizations continue to use a framework that they know is wrong. Easterly also takes a sober look at fads that have swept through the field of development. The first of these is education. Many people argued that investment in basic education is the key to stimulating growth, and this has led to massive investments and high hopes. Unfortunately, in retrospect the evidence shows little correlation between education investment and growth. The same holds true with population control, where the link between population dynamics and growth has proven to be far more complex that originally expected. Easterly does not conclude that the evidence shows that education or population planning is unimportant; to the contrary, they can be effective but only in a broader context where other important conditions are also present. What are some of these broader conditions that must be in place? Fortunately, we have made some progress in understanding what helps counties develop economically and socially. In particular, there is strong evidence that economic growth is the best way of reducing poverty in developing countries. Contrary to what many think, a one percent increase in overall income in a country tends to translate into a one percent increase in the income of the poorest. And we do know that economic growth itself requires countries to maintain policies that avoid certain pitfalls-in particular, high inflation and budget deficits, excessive black market premiums for their local currencies, negative real interest rates, corruption, and restrictive trade policies. If we know at least the minimum policies required for growth and poverty reduction, then why don't most countries adopt them? Thus began another chapter in the history of development aid. Beginning in the 1980s, the World Bank, IMF, and others launched a large number of 'structural adjustment' programs designed to support countries' adoption of these policies. Twenty years later, it is clear, however, that many of these programs were ineffective. There is little evidence that aid has had any influence on countries' policies. Instead, policies seem to be driven by the self-interest of the policy makers and the interests they represent. Easterly's refrain in the book is that 'people respond to incentives,' and this is clearly true at the macro-policy level as well as the household level. One leading edge of thinking about development draws on the simple observation that people tend to associate with people like themselves. Well educated people with access to financial resources, technology, and know-how-some of the main ingredients for economic growth-tend to congregate with and learn from each other. This creates a virtuous cycle for them. Unfortunately the same dynamics hold for the poor. The poor, who tend to be less well educated, have less access to financial resources, technology, and know-how, also tend to congregate with each other. Consequently, the opportunities for learning, investment, and growth are lower. This raises the obvious question of how we can increase interaction between rich and poor, between the more advantaged and less advantaged. This leads us to the current state of affairs, and ironically offers hope for a common ground between traditional policy economists and the critics of aid and globalization. Many of the critics are implicitly or explicitly arguing against corruption and/or policies that are implemented in a way that make the rich richer and the poor poorer-something that the policy economists agree with. Few people nowadays would disagree on the desirability of low inflation and budget deficits, a fairly valued currency, interest rates that encourage savings, and trade policies that don't force consumer to overpay and that give incentives for people to produce and export goods that can generate wealth. The real issue is: How do we get governments to adopt these policies? And how can countries put in place the institutional capacity and governance arrangements that will ensure that good policies are fairly implemented? And how can we increase the direct connections between rich people and poor people? These are as much political and social challenges as they are economic ones. And they require the policy economists and social activists not to butt their heads together, but to put their heads together to find a solution.

This book asks and attempts to answer the following question: How do you raise the standard of living of the vast numbers of people living in terrible poverty in the undeveloped (the third) world?The sub-title of this book is "Economists' Adventures and Misadventures in the Tropics". It was written by William Easterly, who was an economist at the World Bank for 17 years and published in 2001.In the preface to the paperback edition Easterly wrote the following: "...many readers have asked if my statement in the original prologue that `my employer ... the World Bank... encourages gadflies like me to exercise intellectual freedom' was really accurate. Well almost. It should be slightly modified to `the World Bank encourages gadflies like me to find another job.'"Easterly is now a professor at NYU and a non-resident fellow at a "think tank", The Center for Global Development.The book is divided into 14 chapters, with a brief "Intermezzo" between each one. The chapters deal with the nuts and bolts of economic development - what's not worked in the past, what has worked, and what we should be doing in the future. The Intermezzos are real stories of poor people in a variety of countries, that Easterly either met or his associates had met. What their problems are: no roads, no health care, miserable food, no sanitation, children killed in civil wars, stuff like that. "The Elusive Quest..." is less than 300 pages long (not counting the footnotes and bibliography) and I read it in a week, two chapters a day.It is written in an accessible and breezy style and can be read with profit by someone with no background in economics. There is some lingo and economic concepts, but you can gloss over them and still get the gist of Easterly's points.Easterly starts with the basic economist's premise: People respond to incentives. From this perspective Easterly in the first part of the book examines all the failed approaches to Third World economic aid and development since World War 2. These include foreign aid for development, investing in machines, investing in education, limiting population growth (that chapter is called "cash for condoms"), adjustment lending (conditions of reform are put on the loans), and debt forgiveness (think Bono, the Dalai Lama, a few economists, and the Pope - an unlikely grouping).To give one example from the above - adjustment lending. The bankers (IMF, World Bank, private lender, etc) put strings on the loans. "You must reform your banking system" or "you must make it easier for small businesses to start up". Inevitably the reforms are not made, and equally inevitably the money is doled out. After all, the money is allocated, we need to help the poor - so the money is given. And once that precedent is set, well the worst offending countries know they are in the clear and needn't worry about actually making any of the adjustments mandated in the future.The book is far from all negative. For example there is a fascinating section (starts on Page 146) of how Bengladesh developed a garment industry - going from zero exports in 1979, to two billion dollars in exports per year within twenty years. (Remember, people respond to incentives.) But Easterly has no illusions that a simple free market system alone works - government institutions and public services are essential in his view. The rub of course, is effective institutions' providing public services, and Easterly has a large section on the endemic government corruption in developing countries.Easterly makes many interesting points. For instance, there is no correlation between income tax rates and development. So it seems that simply lowering income tax rates (supply side stuff) is irrelevant in the developing world. On the other hand, most income tax is never collected anyway, (the collection rate in Peru is 35% of what should be taken in, given the tax rate) which makes the income tax rate pretty moot.Another point: there is a correlation between government bureaucracy and corruption (bureaucracy, not efficient government-provided public services) and economic growth. And of course it's a big negative correlation. Again, quality institutions are essential in Easterly's view. He has many stories about inefficient and corrupt institutions, which would be humorous if they weren't so pathetic. Nevertheless you have to laugh at his run-ins with Mexican police and Jamaican black market currency operators (Easterly has a fair number of anecdotes and information about Jamaica, that I connected with. I lived there for two years in the late 70's.)In the original preface to the book, Easterly says, "This is a sad story but it can be a hopeful one. We now have statistical evidence to back up theories of how the panaceas failed and how incentive-based policies can work." While his book is a bit more about how the panaceas failed than about what works, it is a superb, fascinating and frequently disturbing read.

I read William Easterly's book, White Man's Burden and found it to be well written; it was witty, yet provided deep insight into the failure of aid in lifting `tropical' countries out of poverty. After reading the Elusive Quest, which was written before the White Man's Burden, it is interesting to see how Mr Easterly's thoughts have developed. His message in The Elusive Quest was, reform Third World governments and the poor shall prosper with the aid of the IMF and World Bank. In White Man's Burden, his position was: Abandon the utopian blueprint to fix the Third World's complex problems. Instead focus on getting specific, incremental improvement in people's lives in fields such as health, sanitation and food security.The Elusive Quest for Growth starts out with an examination of panaceas for development, cooked up by economists at the World Bank and IMF, which have been abysmal failures. William Easterly explains that Domer's financial gap approach to aid, which was a legacy of the Great Depression and rapid Soviet industrialisation, was applied without modification to the newly independent African States. This approach, which assumed that machinery was the key to economic development spectacularly failed to deliver development to the Third World because it was hopelessly flawed (it was intended for short business cycles in rich countries). After examining all the evidence on factors, which determine the long-term prosperity of a country, he showed that improvement in technology is the key determinant of labour-productivity and overall economic growth.The author then goes on to examine some of the other `cures' that IFI (International Finance Institutions) have developed in the elusive quest for growth. One by one he tackles the `cures':- Education: In itself it is as much use to a poor society that wants to grow as `hula hoops', it needs to be combined with other factors such as -wait for it - high-tech machinery or advanced technology to complement the high skills. No surprise here.- Population control: Does not work. Even if desirable, subsidising contraceptives is not the way to go because the price of contraceptives is a minor factor in the decision to have a child. The evidence, instead, shows that, development is the best contraceptive- Debt Relief: Has been misguided because it has tended to go to the countries with bad policies. William Easterly: "If there is any expectation that donors will continue to favour irresponsible governments in the future, then debt relief will run afoul of governments response to incentivesWhat I Liked about the BookFor my money, the best chapters are Chapters 11 and 12, where Mr Easterly discusses how governments can kill growth. The author states, to my surprise, "Despite the obvious importance of corruption in economic development, it has not attracted much attention from economists until recently. As a Nigerian, I don't need a Ph.D in economics to know that corrupt governments can break one's entrepreneurial spirit and kill off the incentive to invest or even to work hard.Mr Easterly's subsequent analysis of the effect of corruption on growth is interesting; he distinguishes between centralised and decentralised corruption and posits that centralised corruption is "better" for growth, using the examples of Zaire and Indonesia. He argues that countries with institutional corruption are weak states with abysmally poor institutions. This analysis struck as me as been too dry. Surely, the fact that growth in Suharto's Indonesia outpaced Mobutu's Zaire must have been due to more complex forces. Mr Easterly's argues for institutional reform. However, the only example of a country, which established institutional reform, was Ghana. Now that's an example to scare corrupt elites everywhere because Ghana only established reform after a military coup led by Jerry Rawlings, in which he executed most of the old-style corrupt elite. Yikes!What I did not Like about the BookThe author's analysis of the impact of ethnic diversity on growth is suspect, even puerile. His analysis is difficult to believe as he does not distinguish between correlation and causation. For example, he states that high ethnic diversity is a good predictor of civil war and genocide and that the most ethnically diverse countries are in Sub Saharan Africa. One wonders if the lack of strong conflict-resolving institutions, and not ethnic diversity, is a more plausible cause for conflict in Sub Saharan Africa.Mr Easterly, no doubt, cares deeply about the poor. He relates his experience in several poor countries with wit and wears his knowledge lightly. He manages to avoid the matter-of-fact manner that is quite popular with economists writing about `serious' issues. However, Mr Easterly attempts to put some human stories into the numbers just to remind the reader that poverty in the Third World is not just about the sterile economic models but about flesh-and-blood people, who struggle to eke out a living every day.While The Elusive Quest for Growth was a good read it was not as punchy as The White Man's Burden. The author seemed to think that the words `tropical' and Third World were synonymous. There were too many economic models and not enough humanity in the pages; the book seemed half-cooked. Therefore, the Elusive Quest deserves only 3 stars.In conclusion, I would recommend White Man's Burden instead of the Elusive Quest to anyone who wants to get a better understanding of the failure of the IFI's and a more mature, worldlier William Easterly.

This book should be read by everyone interested or not in economic growth. It shows a very sad picture of what happens in poor countries.

Un ouvrage iconoclaste par un membre de la banque mondiale qui parle en connaissance de cause. Outre la présentation, c'est un véritable cours d'économie du développement qui nous est offert. En revanche, cet ouvrage est d'autant plus agréable à lire que l'on connait quelques éléments sur la théorie de la croissance et l'économie du développement. Un ouvrage que je recommande à mes étudiants.

Good

Are you that person who wants to understand economics and financial management? Just read this book. Easy and amazingly rewarding.