Customer Reviews

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

5 star:		(42)
4 star:		(15)
3 star:		(5)
2 star:		(1)
1 star:		(5)

 

 

For 5/6ths of the people of Earth, life is a daily struggle for basic needs: food, shelter, medicine. Infant mortality rates are high, women are oppressed, and individuals have limited opportunities to improve their lot.

William Easterly is a Senior Advisor in the Development Research Group of the World Bank. In his first book, he asks why trillion dollars of foreign aid to the countries of the "third world" since WWII have caused essentially no improvement in the quality of life for the people in these countries. I found the writing lucid and the many real stories of poverty and corruption both emotionally powerful and insightful.

Emphasizing a key mantra of economics -- people respond to incentives -- he details the long list of foreign aid tactics that have failed: capital investment (machines, factories, roads), education, birth control, loans, and loan forgiveness. Not that any of the tactics are bad, but rather they are ineffectual in a country lacking key social, political, and economic infrastructure.

Easterly then describes in detail the factors at play in driving growth: increasing returns (Leaks, Matches, Traps), creative destruction through technology, luck, governments kill growth, government corruption, and class and race conflicts.

Easterly shows that achieving economic growth is very difficult, but he does a great job of identifying the key systemic issues that poor countries must address.

Perhaps surprisingly, Easterly's model applies equally well to the economic disparities that exist within countries, even "rich" countries like the United States. The increasing returns model says that highly-skilled people will prefer to live and work with one another ("Matches"), as each of them will be more productive for being around other highly-skilled individuals. So this explains, for example, why areas like Silicon Valley, having once achieved critical mass, continue to grow. And why low-income inner-city and rural areas remain depressed ("Traps").

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.

An economist at the World Bank, Easterly looks back at the dismal economic record of the Third World over the last 40 years and distills lesssons to guide donors and policymakers in the future. He is at his best when dissecting failed policies such as population control or structural adjustment loans, which were embraced by development experts of the day but rested on faulty logic and flopped in practice. The rest of his book contains fascinating, nuanced discussions of how bad governance, "poverty traps," and plain bad luck (such as terms of trade shocks) can keep poor countries trapped in vicious cycles of poverty. Many myths are exploded, such as the belief that poor nations are destined to "catch up" with rich ones, or that international investment flows to capital-poor states in an effort to find higher returns. The text is clearly written and filled with wry humor. However, the failure to discuss how "Asian Tigers" such as Korea, Singapore, and Taiwan broke out of poverty and achieved industrial take off -- at one point, Easterly half-seriously cites "good luck" as a key explanation for their 30-year record of sustained economic growth! -- is a glaring hole and results in my rating of only four stars.

This is surely the most important book published in the field of development economics for many years. The author, who is Senior Adviser to the Development Research Group at the World Bank, is highly familiar with economic theory and empirical research, and is able to expound his knowledge in an engaging and jargon-free manner.

Easterly's aim - in which he succeeds brilliantly - is to show the self-defeating nature of most conventional prescriptions for development, notably foreign aid, investment in technology, education, population control and debt forgiveness. Against all these chimeras - many, if not all, of which, are desirable in their own right in some circumstances - he poses the economic common sense of provision of incentives. The argument is complex but two of Easterley's observations are especially worth noting.

The professional (and almost always economically-untrained) development lobbyists are fond of arguing that what they tendentiously call the neo-liberal consensus ignores the poorest. Easterley demonstrates that this is untrue, citing the work of David Dollar and Aart Kray of the World Bank, who have found that global poverty is attributable, rather, to lack of growth. Using statistical techniques to isolate the direction of causation, these analysts find that a 1 per cent increase in per capita growth in the developing countries causes a 1 per cent rise in the incomes of the poor.

Secondly, debt cancellation has become a fashionable cause for development lobbyists and the Churches - unaware, apparently, that the idea has been tried for at least 20 years (I recall it very well from my time at the Debt and Capital Markets Group at the Bank of England in the 1980s) and has resulted in a self-perpetuating cycle of bad lending. Eaterley's proposal is to tie lending to past performance (i.e. good economic management) to give Third World governments an incentive to pursue growth-creating policies. The alernative - unconditional debt forgiveness - would damage Third World living standards by ensuring a rise in developing countries' cost of capital. Easterley does not spell it out, but affluent western campaigners' demanding a course of action that the Third World would end paying a high cost for is not the most edifying of spectacles.

This book puts paid to much self-serving nonsense. It is a rare gem in a quarry of dross.

This book is likely to spur immense controversy, specially in the current climate of anti-globalization protests. Easterly provides a telling history of well-intentioned but somewhat misguided and didactic development efforts since the Bretton Woods conference. The book speckles careful theoretical exposition with lively anecdotes and "intermezzos" of personal stories from the developing world. This gives the book a humane touch that is often lacking in most economics books.

My only problem with the book is that the author is still rather hung up on the singularity of growth as the panacea for allevaiting poverty. While growth could be sufficent condition for alleviating poverty in many cases it might not be a necessary condition in all cases. The author also neglects environmental concerns that are often not properly internalized in short-term growth models.

I am also wondering what the World Bank establishment have to say about this. Some of the conclusions are so simple, that I am left to wonder why didn't all these smart people "get it?" Perhaps the Bank has its own set of counter-arguments for Easterle's specific examples, which I will continue to explore.

Nevertheless, this is a good read and gives much food for thought.

If you spent 4+ years in graduate school learning about macroeconomics and teaching watered down versions to undergrads, this is a really fun read. All those old-timer theories that seemed to have simply been orphaned in the literature are given a well-deserved empirical refutation. I think we learn so much by acknowledging the explicit failures of previously popular theories, and it sets economics apart from other social sciences.

Easterly has just the right amount of experience, technical training, and compassion for his subject.

Someone should send a copy to Bono of U2 and all the other commentators who think development is as simple as debt foregiveness and good intentions.

This is a brilliant and important book. After you spend only 15 minutes reading the intro & part of chapter 1, you will see very clearly that the topic is of critical importance for the majority of people on this planet.

The book is also very well-written: complex material (when it appears) is explained in terms the average college-educated person can grasp, and Easterly intersperses lots and lots of real-world anecdotes to always keep reminding the reader why we should care about this topic. And he succeeds in making us care.

In order to have any chance at all of devising policies that will actually succeed in improving the plight of the impoverished peoples of the world, we must first examine what's been tried, and understand why it hasn't worked. This is Easterly's plan for the book. For each main paradigm used to understand economic growth and development, Easterly explains the main concepts, explains the basis for the policies that were tried, and offers his analysis of why these policies failed. Easterly believes there's a common theme in understanding what hasn't worked and what might work, and he explains it clearly in his book.

If you are a teacher or student of economics, I especially recommend this book. It very nicely explains the economic intuition behind a LOT of economic theory, including some fairly recent theory that hasn't yet trickled down into undergraduate intermediate level textbooks. It also motivates all the theory with lots and lots of compelling real-world examples.

The Elusive Quest for Growth doesn't offer a balanced look at all viewpoints; that is not its goal. Easterly has a strong point of view, which I guess could be labeled "conservative." Some liberals think that conservatives care more about big business than about the poor, or labor, or the environment (and indeed there are many examples of Republican policies in the U.S. that support this view - just look at Bush's record on the environment). However, Easterly's sole concern is helping the poor, not pushing a conservative agenda down the reader's throat.

At the time I write this, there are 16 other reader reviews, only 3 of which are negative. Two of these three reviews are almost identical and must have been written by the same person ("T Biamonte from Stamford, CT USA"). This reviewer clearly disagrees with Easterly's politics, but his review in my opinion really doesn't offer any effective criticism of Easterly's book itself, not the writing, or the soundness of Easterly's analysis, or the evidence Easterly uses to support this arguments.

So I encourage you to check out this book.

...

Amidst the conclusions of Jeffrey Sachs, the rantings of the Bono-ites, and the Live 8 concert, we have William Easterly who dares to ask the question "Has increased aid and debt relief really done anything to improve the plight of the world's poor?" Easterly truly takes you on an adventure through poverty traps in Latin America, Africa, and South Asia. Easterly shows how previous debt relief regimes failed to provide the proper incentives for third world governments to pursue pro-growth policies. The book is very well researched and chock full of economic models and concepts from famous economists. Sadly however his message will probably be lost as most western governments are afraid of displaying such a hard-nosed realistic approach to poverty relief.

It's January 2005 and the media is awash with calls for long-term aid & debt relief for the 'poor' countries hit by the Sumatra Tsunami. You don't need much of a brain to work out who means well and who (once again) is showboating. For those who genuinely want to know how best to help troubled peoples, this book is an indispensable set of ideas - although, Sri Lanka aside, the rapidly growing countries that were hit by the tsunami aren't actually poor at all.

In his quest for growth, William Easterly takes us through all the interventionist strategies (like debt-relief and international aid) that have been tried in the past 60 years to drag poor nations up from the gutter and he conclusively shows that all of these non-market based solutions have failed. Not failed to hit the targets aspired to by their proponents. But failed utterly to make even a dent.

Easterly then goes on to bring two trends to light. One, that there are dozens of reasons why countries remain poor - bad government, corruption, natural disasters, socialism, war, polarised societies & disease to mention a few. And two, that democratic countries which protect property rights, uphold the rule of law and have good quality services that allow private sector investors to flourish tend to become richer over the long-term - if progress isn't derailed by unforeseen disasters that wipe out large swathes of the active population.

There are also splendid bits on why aid very often harms countries since a large amount of it is political or budget spending & most ends up in the pockets of repressive/corrupt regimes who waste it and use the funds to stay in power. Or why debt-relief is normally only prescribed as a `solution' by people who either don't understand finance or who don't like rich people.

And in contrast to a previous reviewer, I though Easterly was particularly clear on the best way forward. That is to offer individuals a stake in their future by giving them every opportunity to succeed on their own without aid, government dependence or corruption - whether through tax incentives, small business schemes or microeconomic aid that is only allocated to countries which state clearly, in advance, how and when they will use it (subject to checks by independent third parties).

In all, The Elusive Quest for Growth is terrific and after reading it again over Christmas I'd recommend it to anyone thinking seriously about how the world might be made a better place for everyone. Aid addicts & debt deflators beware though, this book makes it clear that you are partly to blame for world poverty. Five stars.

In the introduction William Easterly casually mentions that he was fired from the world bank for writing this book. Obviously there is a message contained in Elusive Quest for Growth that someone doesn't want us to hear. Still I was surprised and impressed when it managed to provide a extensive historical analysis while remaining lively and even amusing at times. This is an amazing feat for any author and doubly so considering the subject of economics. This book is compelling because it offers hard facts but doesn't fail to show the human side that usually gets left out of economics. Absent are the transparent, self serving fairy tales about rational actors that weigh down most of the ivory tower garbage these days. Furthermore, it's thorough and well written. It lays out coherent facts on why virtually every method of development pursued in the last 60 years has been a disaster. Given that, I found Elusive Quest for Growth to be surprisingly apolitical. Still, I want to add a note of caution for those unfamiliar with economics. It could be painfully confusing if you're not up on the current lingo although you will still get the gist.

In my opinion this book should be required reading for every economics student as it provides a stark contrast to what we usually find in our textbooks. The second and third weeks of my development economics course were spent discussing the Harrod-Domar growth model without even bothering to mention how much of a failure it's been. Our textbook had ONE paragraph at the end of an entire chapter where it vaguely alluded to the idea that maybe Harrod-Domar hadn't worked out so well. If I hadn't read this book I would have had no clue what the text was glossing over. I think you will almost instantly appreciate the clarity Easterly brings to the subject. Rather than slinging generalities about the Harrod-Domar Growth Model he provides well referenced case studies regarding it's nature. My only complaint with Elusive Quest for growth is that it doesn't really touch on the motivations of the International Financial Institutions. If you read the book and wondered why these organizations could be so disastrously harmful to the worlds poor, it appears that there are only two rather gruesome options: 1. the IFI's are grossly and consistently incompetent or 2. there is a systematic methodology for destroying infrastructure and forcing countries into debt. Given the brilliance of the people running these operations (Robert McNamara for example) and the sheer quantity of bankering money they were/are entrusted with, I have trouble swallowing option one. It's also interesting to ponder what context might make someone like Paul Wolfowitz competent to run the World Bank given his other political beliefs. What are the incentives here? Perhaps it's best that Elusive Quest didn't get into this but if you read the book and find these questions gnawing at your mind, you should check out a book called Confessions of an Economic Hitman.