Tuesday, February 05, 2008

Book Review: The Elusive Quest for Growth

William Easterly (2001) analyzes a bunch of factors that could influence a nation's rate of economic growth and seems to conclude that the vast majority of specific, conscious efforts by governments to increase the growth rate have not had a clear positive effect.

To date, loans from the IMF/World Bank on average appear to not help, or even harm, recipient nations, partially due to how recipient governments are either temporary (and thus do not have a strong incentive to think long-term) or are autocratic (and thus do not necessarily care about national growth as much as personal gain).

Investment by governments to jump-start specific industries at home, in the absence of an already-vibrant network of commerce, business connections, and a skilled workforce, often fail disastrously. Governmental corruption, by creating a non-productive black market for favors and bribes, tends to slow growth.

The brain drain is another threat to growth for the poorest countries. Poor countries can't build an educated work force if every educated or highly skilled person chooses to migrate to industrialized nations where the wages for highly skilled work are higher.

Two factors strongly associated with low economic growth are income inequality (where a wealthy, educated elite would have a lot to lose if an educated middle class became large enough to seize political power) and ethnic diversity. Ethnically diverse nations tend to be polarized. The costs of polarization include wars, costly political battles, and a slightly less efficient market on the ground due to lack of trust between buyers and sellers.

Possibly the most surprising conclusions of the book are that education and investment often seem to do little good in third-world nations. The reasons for this are complicated. Read the book.

Overall, the books title pretty much gives it away: the quest for growth is elusive. Easterly does a much better job of describing how to promote growth despite complexity in The White Man's Burden (see review below).


Blogger current typist said...

Should I feel depressed? Is the answer that people just have to pull themselves up by their bootstraps, then? (If so, the answer is so elusive it's cliche.)

6:36 PM  
Anonymous Freakwenter said...

There are two issues here. One is the distribution of GDP, the other is the rate of growth of GDP. European countries have demonstrated that government redistribution programs can function well without particularly influencing the growth rate. But for nations with very little GDP, the key issue is growth, before they can even talk about having something to distribute. Easterly argues that there is an "answer" for what causes economic growth, but probably not in the form that most governments can actively apply. He might say that growth comes from people "pulling themselves up by their bootstraps," but a probably analogy would be the rat race or people climbing economic ladders.

6:02 AM  

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