IntroductionIntroduction Title very important: “quest for growth” like Title very important: “quest for growth” like

magical elixirmagical elixir

Three sections:Three sections: I. Why growth mattersI. Why growth matters II. Panaceas that failedII. Panaceas that failed III. People respond to incentivesIII. People respond to incentives

Themes to remember:Themes to remember: ““people do what they get paid for and don’t do what people do what they get paid for and don’t do what

the don’t”the don’t” ““People respond to incentives” People respond to incentives”

I. Why Growth MattersI. Why Growth MattersCh.1: To Help the PoorCh.1: To Help the Poor

Why should we care - the problems Why should we care - the problems of povertyof poverty

Why growth and not other factorsWhy growth and not other factors

II. Panaceas that failed II. Panaceas that failed Ch. 2: Aid to InvestmentCh. 2: Aid to Investment

““financing gap” theory (Harrod-Domar):financing gap” theory (Harrod-Domar): History: depression and cold war History: depression and cold war

Aid Aid

InvestmentInvestment

& & Self-sustained growth Self-sustained growth

Increased Savings Increased Savings

II. Panaceas that failed II. Panaceas that failed Ch. 2: Aid to InvestmentCh. 2: Aid to Investment

Didn’t really work…growth didn’t Didn’t really work…growth didn’t happen!happen!

Academic “heyday” 1960s - 70sAcademic “heyday” 1960s - 70s

Lives on in IFIsLives on in IFIs Investment considered still “necessary” Investment considered still “necessary”

if not “sufficient”if not “sufficient”

II. Panaceas that failed II. Panaceas that failed Ch. 2: Aid to InvestmentCh. 2: Aid to Investment

Empirically proven wrong:Empirically proven wrong: Aid InvestmentAid Investment Investment GrowthInvestment Growth Investment not “necessary” for growthInvestment not “necessary” for growth

Incentives wrong, end its use!Incentives wrong, end its use!

II. Panaceas that failedII. Panaceas that failedCh. 3: Solow’s Surprise: Investment is not Ch. 3: Solow’s Surprise: Investment is not

the key to growththe key to growth

Solow’s theorySolow’s theory: : the only possible source of growth in the long run is the only possible source of growth in the long run is

technological change.technological change.

Solow’s view in cross-country differencesSolow’s view in cross-country differences: : the only reason some countries are poorer than others is the only reason some countries are poorer than others is

that they have started with very little machinery;that they have started with very little machinery; poor tropical countries will have more incentives to grow poor tropical countries will have more incentives to grow

rapidly than the mature temperate economies that rapidly than the mature temperate economies that growing at the rate of technical progress.growing at the rate of technical progress.

II. Panaceas that failedII. Panaceas that failedCh. 3: Solow’s Surprise: Investment is not Ch. 3: Solow’s Surprise: Investment is not

the key to growththe key to growth

The growth that wasn’tThe growth that wasn’t

RomerRomer used data on a sample of 58 tropical countries used data on a sample of 58 tropical countries between 1960-1981 and between 1960-1981 and demonstrated that the Solow’sdemonstrated that the Solow’s prediction failedprediction failed and the poor countries did even worse and the poor countries did even worse than the rich countries did, both before and after these than the rich countries did, both before and after these years.years.

The maximum per capita income has grown strongly over The maximum per capita income has grown strongly over the last half century, while the minimum per capita income the last half century, while the minimum per capita income has almost stagnated with a lower rate in 1998 than in 1950.has almost stagnated with a lower rate in 1998 than in 1950.

II. Panaceas that failedII. Panaceas that failedCh. 4: Educated for what?Ch. 4: Educated for what?

1990 World Declaration on 1990 World Declaration on Education for AllEducation for All

Education ensures “a safer, healthier, more Education ensures “a safer, healthier, more prosperous and environmentally sound prosperous and environmentally sound world contributing to social , economic and world contributing to social , economic and cultural progress, tolerance and cultural progress, tolerance and international cooperation” international cooperation”

II. Panaceas that failedII. Panaceas that failedCh. 4: Educated for what?Ch. 4: Educated for what?

Education explosion:Education explosion:

By 1990, primary enrollment reached 100 By 1990, primary enrollment reached 100 percent in half of the world’s countriespercent in half of the world’s countries

Between 1960-1990 the median college Between 1960-1990 the median college enrollment rate of the countries of the enrollment rate of the countries of the world increased more than 7 times, from world increased more than 7 times, from 1 percent to 7.5 percent.1 percent to 7.5 percent.

II. Panaceas that failedII. Panaceas that failedCh. 4: Educated for what?Ch. 4: Educated for what?

Where is all the education gone?Where is all the education gone?

The response of economic growth to the The response of economic growth to the educational explosion was little or none.educational explosion was little or none.

Studies show that the median growth rate Studies show that the median growth rate of poor countries has fallen over time.of poor countries has fallen over time.

II. Panaceas that failedII. Panaceas that failedCh. 5: Cash for CondomsCh. 5: Cash for Condoms

On why there’s no On why there’s no incentive to have incentive to have unwanted babies!unwanted babies!

II. Panaceas that failedII. Panaceas that failedCh. 5: Cash for CondomsCh. 5: Cash for Condoms

Malthusian fears beliedMalthusian fears belied Population growth due to ‘incentive’ Population growth due to ‘incentive’

to have large families – that changes to have large families – that changes with higher incomeswith higher incomes

Development is the best Development is the best contraceptive contraceptive

II. Panaceas that failedII. Panaceas that failedCh. 6: The Loans That Were, The Growth That Ch. 6: The Loans That Were, The Growth That

Wasn’tWasn’t

Needed Needed

A hard nose for “Good A hard nose for “Good Policy”Policy”

II. Panaceas that failedII. Panaceas that failedCh. 7: Forgive us our debtCh. 7: Forgive us our debt

Donors create perverse Donors create perverse incentivesincentives

Poor policy performance rewardedPoor policy performance rewarded Poverty rewardedPoverty rewarded Corruption did not matterCorruption did not matter Need to build incentives in aid policies for Need to build incentives in aid policies for

‘Good Policies’ to be followed.‘Good Policies’ to be followed.

III. People respond to incentivesIII. People respond to incentivesCh. 8: Tales of Increasing Returns: Leaks, Matches, Ch. 8: Tales of Increasing Returns: Leaks, Matches,

and Trapsand Traps

Q. If Technology is the panacea to Q. If Technology is the panacea to growth, why doesn’t poor countries growth, why doesn’t poor countries adopt advanced technology?adopt advanced technology? Solow’s Flaw- fixed rate of technological progressSolow’s Flaw- fixed rate of technological progress Knowledge (K) and increasing returnsKnowledge (K) and increasing returns

Intrinsic Characteristics of KIntrinsic Characteristics of K Leaks, Matches (Skills) and TrapsLeaks, Matches (Skills) and Traps

Vicious and Virtuous Circles- complements, Vicious and Virtuous Circles- complements, substitutes and path-dependencesubstitutes and path-dependence

Remedy: good policy, but policies Remedy: good policy, but policies alonealone are are not enoughnot enough

III. People respond to incentivesIII. People respond to incentivesCh. 9:Ch. 9: Creative Destruction: The Power of TechnologyCreative Destruction: The Power of Technology

Creative Destruction: boon (poor) and Creative Destruction: boon (poor) and bane (rich)bane (rich) Leap-frog / Resistance (vested interests) Leap-frog / Resistance (vested interests)

Incentives to Invest in K and Skills are low:Incentives to Invest in K and Skills are low: Obsolescence and in-appropriable (tension)Obsolescence and in-appropriable (tension) Market failure in a free market economyMarket failure in a free market economy Path-dependence and luckPath-dependence and luck

Good Policy, to create incentives and LuckGood Policy, to create incentives and Luck

III. People respond to incentivesIII. People respond to incentivesCh. 10:Ch. 10: Under an Evil StarUnder an Evil Star

Q. Why Luck Is Important? Q. Why Luck Is Important? Disturbs the time to Take Off:Disturbs the time to Take Off:

Disasters, Terms of Trade and WarDisasters, Terms of Trade and War Other factors: Other factors:

intangible factors, industrial country growthintangible factors, industrial country growth Roles:Roles:

Luck can explain short term fluctuationsLuck can explain short term fluctuations Policies and fundamental factors explain the Policies and fundamental factors explain the

long-run long-run

III. People respond to incentivesIII. People respond to incentivesCh. 11: Governments Can Kill GrowthCh. 11: Governments Can Kill Growth

Growth is sensitive to the incentive of Growth is sensitive to the incentive of lowering present consumption in lowering present consumption in return for future income. Anything that return for future income. Anything that affects this incentive affects growthaffects this incentive affects growth High inflationHigh inflation Creating a high black market premiumCreating a high black market premium Kill off banksKill off banks Closing the economyClosing the economy

III. People respond to incentivesIII. People respond to incentivesCh. 12: Corruption and GrowthCh. 12: Corruption and Growth

Rating Corruption and Its ConsequencesRating Corruption and Its Consequences International Credit Risk GuideInternational Credit Risk Guide

Varieties of corruption affect growth Varieties of corruption affect growth Decentralized Decentralized CentralizedCentralized

Polices to control corruptionPolices to control corruption Set up quality institutionsSet up quality institutions Establish policies that eliminate incentives for Establish policies that eliminate incentives for

corruptioncorruption

III. People respond to incentivesIII. People respond to incentivesCh. 13:Ch. 13: Polarized Peoples Polarized Peoples

Factions explain part of poor growth attributable Factions explain part of poor growth attributable to government policiesto government policies

Inequality and growthInequality and growth Inverse relationship between redistribution and growthInverse relationship between redistribution and growth

Choices of the OligarchyChoices of the Oligarchy Ethnic polarizationEthnic polarization Foreign aid oblivious to ethnic polarizationForeign aid oblivious to ethnic polarization Countering PolarizationCountering Polarization

Independent institutionsIndependent institutions Middle class consensusMiddle class consensus

ConclusionConclusionCentral Theme I: Growth and Central Theme I: Growth and

PovertyPoverty Trends in worldwide poverty and Trends in worldwide poverty and

world distribution of income still world distribution of income still subject to dispute: subject to dispute: Pratchett: Divergence!Pratchett: Divergence! Sala-i-Martin: Convergence!Sala-i-Martin: Convergence! Milanovic: Increase in Inequality 1988-Milanovic: Increase in Inequality 1988-

9393

Central Theme II: IncentivesCentral Theme II: Incentives

GovernmentsGovernments

DonorsDonors

Private IndividualsPrivate Individuals

How well-supported is How well-supported is Easterly‘s argument?Easterly‘s argument?

Summarizes trends in economic Summarizes trends in economic growth theorygrowth theory

Provides examples of positive Provides examples of positive externalities of knowledge, externalities of knowledge, education, positive expectationseducation, positive expectations

Provides examples of negative Provides examples of negative externalities of bad governance and externalities of bad governance and political conflictpolitical conflict

How well-supported is How well-supported is Easterly‘s argument?Easterly‘s argument?

Poses important questions, does not Poses important questions, does not provide many answers. provide many answers.

Does not discuss priorities and trade-offs Does not discuss priorities and trade-offs between different recommendations. between different recommendations.

Open question: How to design a Open question: How to design a development strategy? development strategy?

How to How to ““get incentives right“ for get incentives right“ for governments? How to induce governments? How to induce institutional change?institutional change?