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ELUSIVE QUEST FOR GROWTH:

A REVIEW

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World Bank economist William Easterly published a book, "The Elusive Quest for Growth". A highly appraised book in which he is highly critical of both economic theorists and foreign-aid providers, including his employer, for failing to come up with a workable theory of economic growth or a means of implementing it. Since the end of World War II economists have tried to figure out how poor countries in the tropics could attain standards of living approaching those of countries in Europe and North America. Attempted remedies have included, investing in machines, providing foreign aid, fostering education, controlling population growth but unfortunately none of these solutions have been delivered as promised. The overall economic conditions have remained as such, infact; in certain areas have deteriorated further. There has been a lot of hue and cry around the world criticizing the policies of the international financial institutions. The problem is not the failure of economics, but the failure to apply economic principles to practical policy work. In his Easterly first discusses the importance of growth. He then analyzes the development solutions that have failed. Finally, he suggests alternative approaches to the problem. Written in an accessible, at times disrespectful style, Easterly’s book combines modern growth theory and his fieldwork experience for the World Bank.

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What provides ample proof that Easterly is correct can be the fact that many developing countries are worse off today, than they were many years ago. To be on the safe side William Easterly published a summary of his book in London’s Financial Times newspaper on July 4, a little time before his book was to hit the shelves. In the article, Easterly wrote:

"Contrary to conventional wisdom, aid to the developing world has been a big disappointment. Consider the facts, and it soon becomes evident that the $1 trillion spent on aid since the 1960s, with the efforts of advisers, foreign-aid givers, the International Monetary Fund and the World Bank, have all failed to attain the desired results."

Easterly's statement is based on open to everyone and above all a simple fact, which cannot be denied. But, like many other authors before, Easterly soon found himself suffering the rage of those who fear the truth. This rage started from nowhere but his own employers, The World Bank. The Bank said Easterly violated its policy by publishing this article without prior approval. The bank’s policy was that Easterly could only exactly say the same thing in his book or academic journal. 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 economy. 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 analysis 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.

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In his book, William Easterly addresses the whole question of economic growth, that is, where does it come from? What encourages it? What discourages it? How important is luck? How important is policy? The answers he gives, in certain respects, apply as much to advanced economies like the U.S., Germany and Japan as to the developing nations of Africa and Asia. Mr. Easterly makes the critical point that while knowledge is essential for growth, increasing the investment in education is not always the way to get it. In one of the fascinating anecdotes that fill his book, he explains how Bangladesh became a world leader in textile production. A Korean company invited some people from Bangladesh to learn its production methods, in return for a percentage of the profits in future Bangladeshi enterprises. The 130 workers sent on that first training mission soon learned so much that almost all of them went on to establish successful textile companies of their own. Mr. Easterly explains how a critical mass of people with such knowledge can multiply growth still further-essentially by creating knowledge clusters in which generally like-minded people bounce ideas off each other and compete. This dynamic is one reason why incomes are higher in cities than in rural areas and why nations that are already technologically advanced will quickly become more so, as they attract the best and brightest from around the world. 

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.

“In Easterly's view, there are a few big lessons from the history: "Prosperity happens when all the players in the development game have the right incentives. It happens when government incentives induce technological adaptation, high-quality investment in machines, and high-quality schooling. It happens when donors face incentives that induce them to give aid to countries with good policies where aid will have high payoffs, not to countries with poor policies where aid is wasted. It happens when the poor get good opportunities and incentives... It happens when politics is not polarized between hostile interest groups, but there is a common consensus to invest in the future. Broad and deep development happens when a government that is held accountable for its actions energetically takes up the task of investing in collective goods like health, education, and the rule of law..."     

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         It is impossible to convey the depth and range of "The Elusive Quest for Growth." Not only does it offer a persuasive argument but also it summarizes, readably, a vast amount of research, making it come to life with real-world examples. A must read for every economist and every citizen interested in enhancing the economy.

References

  •  www.j-bradford-delong.net/TotW/Easterly_neoliberal
  • www.vanderbilt.edu
  • www.worldbank.gov/research/growth
  • www.amazon.com
  • www.globalpolicy.org
 
 


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