Transcript Tales of Increasing Returns: Leaks, Matches, and Traps

Introduction
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Title very important: “quest for growth” like magical
elixir
Three sections:
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I. Why growth matters
II. Panaceas that failed
III. People respond to incentives
Themes to remember:
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“people do what they get paid for and don’t do what the
don’t”
“People respond to incentives”
I. Why Growth Matters
Ch.1: To Help the Poor
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Why should we care - the problems of
poverty
Why growth and not other factors
II. Panaceas that failed
Ch. 2: Aid to Investment
“financing gap” theory (Harrod-Domar):
 History: depression and cold war
Aid
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Investment
&
Increased Savings
Self-sustained growth
II. Panaceas that failed
Ch. 2: Aid to Investment
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Didn’t really work…growth didn’t happen!
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Academic “heyday” 1960s - 70s
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Lives on in IFIs
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Investment considered still “necessary” if not
“sufficient”
II. Panaceas that failed
Ch. 2: Aid to Investment
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Empirically proven wrong:
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Aid
Investment
Investment
Growth
Investment not “necessary” for growth
Incentives wrong, end its use!
II. Panaceas that failed
Ch. 3: Solow’s Surprise: Investment is not the
key to growth
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Solow’s theory:
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the only possible source of growth in the long run is
technological change.
Solow’s view in cross-country differences:
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the only reason some countries are poorer than others is that
they have started with very little machinery;
poor tropical countries will have more incentives to grow rapidly
than the mature temperate economies that growing at the rate
of technical progress.
II. Panaceas that failed
Ch. 3: Solow’s Surprise: Investment is not the
key to growth
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The growth that wasn’t
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Romer used data on a sample of 58 tropical countries between
1960-1981 and demonstrated that the Solow’s prediction
failed and the poor countries did even worse than the rich
countries did, both before and after these years.
The maximum per capita income has grown strongly over the last
half century, while the minimum per capita income has almost
stagnated with a lower rate in 1998 than in 1950.
II. Panaceas that failed
Ch. 4: Educated for what?
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1990 World Declaration on Education
for All
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Education ensures “a safer, healthier, more
prosperous and environmentally sound world
contributing to social , economic and cultural
progress, tolerance and international cooperation”
II. Panaceas that failed
Ch. 4: Educated for what?
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Education explosion:
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By 1990, primary enrollment reached 100
percent in half of the world’s countries
Between 1960-1990 the median college
enrollment rate of the countries of the world
increased more than 7 times, from 1 percent
to 7.5 percent.
II. Panaceas that failed
Ch. 4: Educated for what?
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Where is all the education gone?
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The response of economic growth to the
educational explosion was little or none.
Studies show that the median growth rate of
poor countries has fallen over time.
II. Panaceas that failed
Ch. 5: Cash for Condoms
On why there’s no incentive to
have unwanted babies!
II. Panaceas that failed
Ch. 5: Cash for Condoms
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Malthusian fears belied
Population growth due to ‘incentive’ to
have large families – that changes with
higher incomes
Development is the best contraceptive
II. Panaceas that failed
Ch. 6: The Loans That Were, The Growth That
Wasn’t
Needed
A hard nose for “Good Policy”
II. Panaceas that failed
Ch. 7: Forgive us our debt
Donors create perverse incentives
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Poor policy performance rewarded
Poverty rewarded
Corruption did not matter
Need to build incentives in aid policies for ‘Good
Policies’ to be followed.
III. People respond to incentives
Ch. 8: Tales of Increasing Returns: Leaks, Matches,
and Traps
Q. If Technology is the panacea to growth,
why doesn’t poor countries adopt
advanced technology?
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Intrinsic Characteristics of K
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Solow’s Flaw- fixed rate of technological progress
Knowledge (K) and increasing returns
Leaks, Matches (Skills) and Traps
Vicious and Virtuous Circles- complements,
substitutes and path-dependence
Remedy: good policy, but policies alone are not
enough
III. People respond to incentives
Ch. 9: Creative Destruction: The Power of Technology
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Creative Destruction: boon (poor) and
bane (rich)
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Incentives to Invest in K and Skills are
low:
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Leap-frog / Resistance (vested interests)
Obsolescence and in-appropriable (tension)
Market failure in a free market economy
Path-dependence and luck
Good Policy, to create incentives and Luck
III. People respond to incentives
Ch. 10: Under an Evil Star
Q. Why Luck Is Important?
 Disturbs the time to Take Off:
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Other factors:
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Disasters, Terms of Trade and War
intangible factors, industrial country growth
Roles:
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Luck can explain short term fluctuations
Policies and fundamental factors explain the
long-run
III. People respond to incentives
Ch. 11: Governments Can Kill Growth
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Growth is sensitive to the incentive of
lowering present consumption in return for
future income. Anything that affects this
incentive affects growth
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High inflation
Creating a high black market premium
Kill off banks
Closing the economy
III. People respond to incentives
Ch. 12: Corruption and Growth
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Rating Corruption and Its Consequences
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Varieties of corruption affect growth
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International Credit Risk Guide
Decentralized
Centralized
Polices to control corruption
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Set up quality institutions
Establish policies that eliminate incentives for
corruption
III. People respond to incentives
Ch. 13: Polarized Peoples
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Factions explain part of poor growth attributable to
government policies
Inequality and growth
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Inverse relationship between redistribution and growth
Choices of the Oligarchy
Ethnic polarization
Foreign aid oblivious to ethnic polarization
Countering Polarization
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Independent institutions
Middle class consensus
Conclusion
Central Theme I: Growth and
Poverty
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Trends in worldwide poverty and world
distribution of income still subject to
dispute:
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Pratchett: Divergence!
Sala-i-Martin: Convergence!
Milanovic: Increase in Inequality 1988-93
Central Theme II: Incentives
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Governments
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Donors
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Private Individuals
How well-supported is Easterly‘s
argument?
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Summarizes trends in economic growth
theory
Provides examples of positive externalities
of knowledge, education, positive
expectations
Provides examples of negative
externalities of bad governance and
political conflict
How well-supported is Easterly‘s
argument?
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Poses important questions, does not
provide many answers.
Does not discuss priorities and trade-offs
between different recommendations.
Open question: How to design a
development strategy?
How to “get incentives right“ for
governments? How to induce institutional
change?