Latest read – “The Elusive Quest for Growth”

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.

"The Elusive Quest for Growth" seems to have been well-received by people interested in development. There are fifty reviews on the amazon.com website, which is a huge number for a book of this type. Amazon.com: Reviews for The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics: Books: William…