The Elusive Quest for Growth

7/1/2003

By William Easterly

MIT Press 2002 Paperback Buy here

Book Review
Reviewed by Scott Beaulier

A good book is often hard to find. This is especially true when searching for a good book written by an economist. William Easterly’s The Elusive Quest for Growth (MIT Press, 2001) stands out as a remarkable exception to this general rule. Many good books captivate the reader through mystery, suspense, or romance, but Easterly’s book is a story of unparalleled tragedy. This tragedy is an actual account of the death, destruction, and waste that has been generated by the International Monetary Fund (IMF) and World Bank in their attempts to alleviate Third World poverty.

Easterly wastes no time in getting to his greatest concern: the deaths of millions of innocent individuals. The first chapter provides figures on the harsh realities of poverty. He notes that “in the poorest fifth of countries, the infant mortality rate is 20% (compared to .4% in the richest fifth of countries)” (8). In addition, “two million children die every year of dehydration from diarrhea. Another 2 million children die annually from pertussis, polio, diphtheria, tetanus, and measles” (8). Among the most heart-wrenching statistics in the chapter is disease among children: “Between 170 million and 400 million children annually are infected with intestinal parasites like hookworm and roundworm, which impair cognition and cause anemia and failure to thrive” (9). For Easterly, it is the “deaths of the innocents” that ought to be the primary concern of development policy; the rest of his book assesses how effective the policies of the IMF and World Bank have been in addressing and alleviating these problems.

Section II of the book (chapters 2-7) highlights the changing conventional wisdom of development policymakers. These chapters trace Western policymakers’ changing beliefs about the key determinants of economic growth over the last 50 years. In the 1950s and 1960s, it was believed that development required nothing more than financial aid from outside institutions to fill the investment gap that supposedly existed between the “actual” level of investment in a poor country and the “optimal” level of investment. As a mountain of evidence built up against this simplistic theory of growth, policymakers shifted to alternative models. For a while, the alternative was a human capital model—poor countries just needed more education spending in order to grow. When policymakers began to realize that the human capital model was also inadequate, they went about shifting most of their resources to new alternatives, such as a population control model or a public works investment model.

Easterly does a nice job of tracing the track record of these various development policies. The reader will walk away from this section with a bitter taste in her mouth; the amount of resources allocated to the development problem and the lack of results produced by adhering to these various development models is mind-boggling. A figure that best summarizes one of the colossal failures of development planning relates to aid in Zambia. Easterly argues that “…if filling the financing gap [with $2 billion of aid] had worked as predicted, Zambia today would be an industrialized country with a per capita income of $20,000, instead of its actual condition as one of the poorest countries in the world with a per capita income of $600.” When we look at the long-run growth record of most developing countries, we see that, with hindsight, the poor would have been better served if the allotted money for development had just been put into long-term bonds. Nearly any alternative investment could have done better than the long-term rate of zero growth that was realized in the average developing country from 1980-1998.

In Section III (chapters 8-14), Easterly turns from retrospection to an analysis of how development aid can be dramatically improved in the future. This is by far the most interesting and controversial section of his book. Chapter after chapter, he hits the reader over the head with his “people respond to incentives” theme. He offers many policy alternatives, which he believes will lead to better incentive alignment between policymakers, political leaders in developing countries, and the poor. Many of these suggestions seem like reasonable ways to improve development policy, yet it sometimes seems like Easterly is failing to keep in mind the lessons of his own analysis.

I found “Under an Evil Star” the most problematic chapter. The basic thesis of this chapter is that randomness is a significant component of economic growth. Therefore, countries that have performed poorly one year should be expected to do better the next year; similarly, countries that have prospered in one period will be less likely to do as well in the next. This process is known as mean reversion. In Easterly’s mind, mean reversion seems to be an iron law of history.

There are a multitude of problems with this argument. The main question is whether economic growth is really all that dependent on luck. If luck is a primary determinant of economic growth, then it seems that Easterly’s policy reform arguments play only a supporting role; Easterly is negating the value of his own policy suggestions by stating that economic growth is, in large part, random. If the policymaker were to continue to improve his policies year after year, why should we expect mean reversion? For instance, look at Botswana’s post-colonial development; from 1960-1995, Botswana had the fastest growing economy in the world. If we were to follow Easterly’s mean reversion claim, we would have expected that Botswana would grow at a slower rate in the 1970’s or 1980’s because it grew so fast in earlier time periods. Yet, just the opposite occurred! By consistently adopting more pro-growth policies, Botswana did anything but revert to the mean. The same could be said for a whole host of countries that have been successful and others that have struggled: because you have done poorly (or well) in the past does not mean that you will probably do better (or worse) in the future.

In addition to the problems that arise with Easterly’s mean reversion arguments, there are other weaknesses in the book. First, Easterly’s analysis lacks an appreciation for public choice analysis. In many ways, his arguments for reform of the IMF and World Bank are best-case scenarios. If we approach the problem in a more realistic light and give officials of the IMF and World Bank less credit than Easterly does, we realize that reform might be much messier than we think. Easterly provides us with a picture of what a more effective IMF and World Bank would look like, but he does not offer us much in the way of how we could possibly go from where we are (a grossly inefficient IMF) to where we would like to be (the IMF that Easterly envisions). This is a central question for any political economist, but one that Easterly seriously sidesteps.

Second, he does not mention the role that ideology and public opinion can play in the reform process in developing countries. If individuals in developing countries have backward beliefs, this could seriously constrain reform attempts. If individuals are reluctant to welcome market reforms into their countries, is it our obligation to just impose the “necessary” reforms upon them? The willingness of the poor to welcome change seems to be a serious component of whether or not reforms “stick,” yet this issue is not taken up in Easterly’s work.

Third, Easterly should realize that one implication of his homogeneity and ethnic division argument is that there should be much greater fractionalization. If, as Easterly maintains, ethnic diversity is a serious hindrance to the economic performance of a country, then one way to resolve problems created by diversity is to permit the secession of ethnic groups that cannot get along within a particular nation. If the Czechs and the Slovaks are constantly fighting over public goods and the control of a nation, then one solution is to let each group of people go their separate way. If homogeneity is what is required for better economic performance, then one way to get there is to permit many more autonomous regions than those which currently exist. I would be very surprised if Easterly actually endorses this policy implication.

Finally, perhaps there should be a greater sense of humility from contemporary economists—including Easterly. We have more than 50 years of evidence telling us that most, if not all, development policies endorsed and pursued by Western policymakers have not worked very well. In spite of this evidence, most economists feel very comfortable jumping on the bandwagon of the trendy development model of the moment—the “institutions matter” model. This “neo-liberal” approach to economic growth maintains that the institutions of the rule of law, private property, and openness to trade are the keys to the economic growth and development of poor countries. While it is difficult for us to currently see how this argument could be wrong, we should keep in mind that the proponents of earlier development models had a similar confidence in their approach. Is it possible that, in 20 years or so, economists will find that the “neo-liberal” model of economic growth was also a tragically misguided one? It seems that economists have not really learned to be more wary of endorsing the latest fashionable theory of development in spite of the history of errors that Easterly documents.

Despite these concerns, I wholeheartedly recommend that readers take the time to read this book. In an era when Joseph Stiglitz is weighing in with a book suggesting that the IMF and World Bank should be more involved, it is nice to have a highly respected voice in the economic world maintaining that the IMF and World Bank are at the root of the Third World development problem. As the voice of dissension among top academic development writings, Easterly’s book is arguably the most important development book published in quite some time. While this review has reservations related to some of the specifics in Easterly’s reform proposals, it should be noted that the roadmap to reform that he provides is the best one currently available. For generations to come, economists who argue for constraints on the IMF and World Bank will owe a special thanks to William Easterly for making such a critical position a respectable one to hold.