Book Review of William Easterly’s “The Elusive Quest for Growth”

William Easterly’s The Elusive Quest for Growth is a very lively, readable and not so technical book about development economics of the past 50 years. Combining analysis and narrative in an admirable way seldom seen in economic writings, Easterly chronicles the results of economists trying to determine the key to enabling poor countries in the tropics become richer. Although many solutions have been put forward, often with great enthusiasm in the beginning, disappointment would ultimately reign in the end. What they all lacked, according to Easterly, is the application of one of the most basic of all economic principles: people respond to incentives. That is, unless we give the players in the development game – the First world donors, Third world citizens and Third world governments – the right incentives for growth, all programs are bound to end in failure.

In the first section (I) and chapter, one starts off reading about descriptions and statistics of poverty as well as the author’s explanations of why growth matters. Here, the description of poverty in a village in Pakistan fittingly puts a human face to the topic at hand. Section II (chapters 2-7), the centerpiece of the book, focuses on the panaceas promoted by development economists in the past 50 years which have failed. Starting from the 1950s, economists believed financial aid was needed to fill the investment gap that existed in poor countries. When aid for investment in physical capital did not seem to work, the next panacea promoted was investment in education. This was followed by the solution of population control, then adjustment loans and finally debt forgiveness. All this has resulted in over $1 trillion in aid yet poverty still persists in the world today. The reason for such failure? Not getting incentives right, a surprisingly simple thought which Easterly expands on more in section III of the book.

This final section (III) of the book (chapters 8-14) describes how putting incentives in the center allows us to learn from the mistakes of the past and make development aid more effective. Here Easterly draws from many of the major ideas in recent economics literature on growth. Besides offering a wealth of policy recommendation which range from being careful about government intervention affecting incentives to strengthening institutions to get rid of corruption and provide a better business climate, Easterly also touches on the New Growth theory, the role of technology innovation, the role of luck and the need to mitigate polarization between different ethnic factions. All in all, the information in this section is less structured and orderly than in the previous section as Easterly does not give us a sense of which theories and recommendations he feels are more important and which less. Such gives the impression that there’s little coherence in his strategy to creating economic growth but then again having just reviewed 50 years of failed panaceas, Easterly would probably be the last person to want to come out with an all encompassing theory of economic growth.

While not wanting to take anything away from the brilliant achievement of Easterly’s book, a few criticisms are in order. Firstly, while criticizing various panaceas which have failed in the past 50 years, Easterly himself seems close to endorsing some solutions of his own. The third section of the book is full of prescriptions for good development policies and one wonders whether Easterly has failed to remember the lessons of his own analysis in the previous section. In the spirit of his previous section, this reviewer thinks that less enthusiasm should probably have been shown in regards to Easterly’s support of the institutional model and the New Growth theory model. Both the focus on the importance of institutions for growth and the assumption that growth is an endogenous variable are the trendy models of the moment. Yet just as previous expected panaceas were eventually discredited, the same may happen to these two new panaceas within a generation.

Secondly, a prescription by Easterly which this reviewer found unsatisfying is the promotion of a merit-based compensation system for donors. Rather than aid being channeled according to need, Easterly recommends that only those countries that show they have used aid properly and can use it properly again would be given aid. On one level, such logic seems undeniable as money would not go to waste or be swallowed up by corrupt governments. Such a proposal is also in keeping with his desire to use proper incentives. However, the issue is more complex than described by Easterly. While no one wants their hard-earned money to go into the coffers of corrupt politicians, a system of aid allocation Easterly is recommending would only leave many poor countries with structurally weak governments further behind. Certainly, in this case, good solutions are hard to find though Easterly’s leaves much to be desired.

A further qualm is that at some places in his book, Easterly seems to contradict himself. He spends a whole chapter (10) speaking about the role of luck in economic growth. Yet if luck plays such an important role, what good would his policy suggestions be? Furthermore, Easterly includes increasing education and human capital as one of the panaceas which have failed (chapter 4). Easterly eventually makes an about turn, speaking more positively of the role of education when promoting an endogenous growth model in chapter 8. Indeed, as he points out, education may have spillovers, exhibits strong complementarities and tends to work more if everyone gets educated.

Lastly, Easterly – perhaps due to being an economist – does not show an awareness of the role of politics on aid policies, nor how his suggestions may be practical in real life politics. Easterly seems to treat the World Bank and International Monetary Fund (IMF) as neutral entities seeking to do their best to help the poor. Thus his main criticism of these organizations is that they’ve been trusting in the wrong policies (panaceas) and thus that’s why development has been such a failure. Throughout the book, it has never seemed to occur to him that power politics have been involved in various policy failures. The power structure of the World Bank and IMF is after all dominated by the developed countries which gives them most of the say on the amount and the beneficiary of aid from these two organizations. Furthermore, aid was undeniably dictated by Cold War realities before the fall of the Soviet Union. For example, a reason why aid was disbursed to many corrupt governments that would never have used it properly was simply due to the fact that a country supported the U.S. during the Cold War. Thus, it wasn’t always a failure to understand that there is a need to get the incentives for growth right. In addition, Easterly’s chapter on factionalism (Chapter 13), while theoretically correct, doesn’t help politicians much. He maintains that too much ethnic diversity in a country hinders growth. While no doubt true, what would this mean politically? Is Easterly suggesting that that independence be granted to ethic groups so there would be more homogeneity which is more conducive to growth?

On a more positive note, Easterly’s book features little “intermezzos” placed in between chapters that tell of the daily life of the poor. This helps us to remain focused on the fact that it is for these people and eradicating their poverty that we are engaged in such an intellectual exercise of what works for them.

The uniqueness of this book, as with Joseph Stiglitz’s Globalization and It’s Discontents, stems from the fact that while there have been many devastating critiques of the policies of the World Bank and the IMF from the left, Easterly and Stiglitz do so from a position of one who has worked for the World Bank as a high level economist before. Easterly was in fact working for the World Bank when he was writing his book. The response to his book from World Bank chief economist and senior vice president Nicholas Stern was that Easterly was “a little behind the curve” in his appraisal of the World Bank’s performance in the Third World and his understanding of how things have changed. One important point to note is that by the time of Easterly’s book, the World Bank had already come out with its own analysis of its aid efforts in a report entitled “Assessing Aid” . The difference between the two was said to be “mostly one of nuance” with Easterly’s book being “a bit more negative.” That negativity perhaps played a big part in the parting of ways between the World Bank and Easterly, which occurred soon after. And this negative and pessimistic tone of the book is the final criticism this reviewer has for this otherwise great book.

While targeted at a broad audience, a little knowledge of development economics would enable the reader to appreciate this book more. Overall, The Elusive Quest for Growth stands as a remarkable accomplishment in its survey of the past 50 years of development economics as well as a timely reminder of getting back to the basic message of economics that incentives matter. Despite the above concerns, this reviewer wholeheartedly recommends this book to all who are interested to know how to help the poorer countries. There is much to take away from this book, not least the understanding of how difficult the problem of making poor countries rich is. Indeed, development is complex and so is understanding the ways of human beings. To the extent that readers of this book realize this and learn from past development mistakes, without at the same time being too pessimistic, much good will come from reading this challenging book.

Bibliography

Alesina, A. & Dollar, D., Who Gives Foreign Aid to Whom and Why?, NBER Working Paper no. w6612, June 1998.

Easterly, W., The Elusive Quest for Growth, MIT Press, Cambridge, 2001.

Ringle, K., “Bank Shot”, Washington Post, 20 Mar 2002, P C01.

World Bank, Assessing Aid – What Works, What Doesn’t and Why, Oxford University Press, 1998