The Elusive Quest For Growth - reviewed by R. Marus and D. Peta

"The Elusive Quest For Growth: Economists' Adventures and Misadventures In The Tropics"By William Easterly The MIT Press 2001 Cambridge Massachusetts

elusivequest.jpg London, England Reviewed by: Rachel Markus & Doug Peta

In The Elusive Quest for Growth, William Easterly examines economists' mostly failed efforts since the end of World War II to help developing countries achieve standards of living more commensurate with those of the rich countries of North America and Developed Europe. Focusing on the gap between policy makers' intentions and the results of their exertions, Easterly finds that real-world economic problems can be stubbornly resistant to the application of accepted economic principles. While some of the policies producing sorely wanting results were founded on economic assumptions that were later discredited, he cautions that even the finest economic insights may not translate into sure-fire policies.

Easterly's discussion of the failure of modern growth theory to achieve desired effects, leavened by anecdotes from his fieldwork as an economist and his personal views and misgivings, is easily comprehended. Readers unfamiliar with the arena of development economics should find the book accessible and interesting. Those more familiar with the field, who seek more detailed analyses of why fifty years of attempts to improve the growth trajectories of many developing countries have been so unsuccessful may be frustrated. These readers may as well find Easterly's focal argument that proposed solutions have regularly violated one of the most basic principles of economics -- people respond to incentives -- obvious and cavalierly advanced without much of a consideration of exogenous factors. All readers will be drawn by Easterly's insider status. A Senior Advisor in the Development Research Group of the World Bank, Easterly is himself a member of one the institutions with which he finds fault for advancing incongruous policies and for failing to correctly assess the motivations of the varied players involved. His candor and idealism can be endearing, as can his willingness to accept blame and to forthrightly examine his own organization's shortcomings. Unfortunately, the controversy surrounding the book's publication in July seems to overshadow the work itself. Easterly's critiques and alternative proposals are not searingly elucidating, and his tone is neither iconoclastic nor critical enough to have sparked such an outcry from other World Bank officials.

In the aftermath of the second World War, economists began an ambitious quest to discover the means through which poor countries of the tropics could endeavor to attain wealth on the scale of the rich countries in North America and Europe. (Easterly makes sweeping reference to the "tropics" to apply to all the poorer countries outside the rich areas in North America and Europe. His use of the term does not apply to geography or climate; it is merely his shorthand for countries with lesser wealth.) The "tropics" shorthand is a minor matter, but of more import is Easterly's failure to explicitly define what makes a country "rich." There is no discussion of the disparity of concentrations of wealth within nations and no consideration of whether the failed tropical policies and programs may have been successfully applied to improving the poor sections of the rich countries. A reader may admire Easterly's idealism, but his failure to address motivations other than wealthy nation altruism (when growth spreads, it creates and/or expands markets for goods produced in rich countries) driving the quest for tropical growth weakens his analysis of the faults of the resultant policies. A complete analysis of policies meant to induce growth cannot be undertaken without a consideration of how the motivation underlying them may have inherently affected their development, direction, and application.

After first discussing why growth matters to developing countries, Easterly identifies many panaceas that have failed to deliver intended expansion, including: providing foreign aid, fostering investment in machines, increasing education expenditures, controlling population growth, and offering conditional aid loans as well as loan forgiveness. His discussion of the reasons for the disappointment of economic development programs and disavowal of some explanations by economists for income disparities across nations is lengthy and not terribly illuminating. To Easterly, the fundamental problem with all these attempts is they ignored the cardinal proposition that people respond to incentives. Easterly acknowledges that both donors and recipients must be provided with adequate motivations, and that any program either lacking or providing perverse incentives is destined to fall short of its mission. He then draws on examples over the last forty years where even incentive-based views of growth have proven as misguided as the failed panaceas discussed earlier, for Easterly rightfully concedes the difficulties involved with correctly aligning the interconnected enticement networks of incentives between government, the donors, and the people. Both the institutional donors and recipient governments can be prone to corruption, polarization, fractious politics and exogenous factors (e.g. war) that complicate and distort policies designed to promote growth.

While Easterly successfully shows his readers why growth matters and illustrates how incentives are requisite for development policies and programs to facilitate growth in poor countries, his alternative approaches to the problem fall short. Aside from identifying that progress will only come from creating incentives for the "trinity of governments, donors, and individuals," Easterly does not offer his readers any specific solutions. Although he has debunked the practical application of many economic policies and criticized some actions by the World Bank and International Monetary Fund, he still professes a need for these institutions and leaves readers with only vague allusions to what needs to be improved and a hope that the "quest for growth" over the next fifty years will yield far better results than in the past. The Elusive Quest for Growth, with its accessible and candid style and personal anecdotes, provides those unfamiliar with development economics with a valid assessment of the lack of achievement in the field over the last fifty years. However, readers seeking more detailed explanations for economists' misadventures and for concrete practical alternatives will find this quest itself elusive.

Argentina's sudden and complete political deterioration -- followed by the largest sovereign debt default in history -- occurring as this review was being prepared for posting, illustrates both the importance and challenge of economic policy and the fluidity of the boundary between the wealthy and the tropical. At the turn of the last century, the Argentinean GDP equaled that of the United States. Argentina was heretofore a poster child for multilateral lending institutions, as free market reforms in the 1990's and the practice of pegging the peso's value to the US dollar helped the country to overcome its hyperinflationary past.

The crisis underscores the complexity of aligning incentives, not only within countries, but as well as between nations and organizations. Although the dollarization in Argentina cured inflationary problems, it made Argentine products costly in world markets as the US dollar gained strength, hampering Argentina's growth. Now, different incentives shall stymie a quick solution, as a devaluation would lead to decreasing salaries and consumer buying power, yet most economists see a free-fall in the peso's value as unavoidable in the near-term. The interim Argentine government has announced intentions to roll out a "third currency" to float alongside the peso and dollar in efforts to avert immediate devaluation and to help pay its bills, yet the IMF is unlikely to go along with this unorthodox currency scheme. The IMF has recently counted provincial IOUs (which the Peronist leaders said would be absorbed by the new, third currency) as part of Argentina's fiscal deficit and used that as an argument to cut off lending to the country.

The civil disturbances which have flared in Argentina due to this recent economic exigency shall also affect which policies are adopted, for the incentives of preventing further political and civil turmoil may, at least in the short term, preclude the adoption of programs most likely to lead to longer-term growth. The quest for growth is not inherently elusive, rather it's complicated and needs the consent of diverse parties. In their quest for growth economists may first need to decide growth at what cost, and then assess whether the "poor" country's government and populace is willing to endure austere measures to allow for such growth. Perhaps only then can prescriptives for growth be adopted and bear fruition.