Thursday, January 20, 2011

Demolishing Dogma`s in Economics

A few days ago, I fished out a book from a crate awaiting its turn to get dumped in the `combustibles` garbage-bin down the corridor. It was a book by William Easterly, titled `The Elusive Quest for Growth`. Having read some of his papers for my thesis, I flipped through it and found that it was written while he was working as a World Bank economist in 2001.

In the original edition, Easterly had praised WB for letting letting gadflies like him to `exercise intellectual freedom`, but later, for the paperback edition, he modified it to `the WB encourages gadflies like find another job`. Now this got me curious. What was in this book that made the bank so queasy?

Quite a lot, actually. The book is essentially a sugar-coated indictment of the Western approach to aid & development, for overlooking (or ignoring) one basic tenet -- that people respond to incentives. One by one, Easterly picks up the growth-mantras promoted by the Bretton Woods institutions and shows how shallow and grossly inadequate they were for the task at hand: growth and poverty alleviation. What is even worse is the fact that these misguided approaches continue to be the bedrock of most multilateral programs in international development.

He starts with the dogma of `Aid for Development` (aka the financing-gap approach) and illustrates with the case of Ghana (1957-84) how it reduced a country full of potential and promise into a basket-case banana republic. This idea of aid-financed investment in dams, roads and machines to promote growth, was based on a 1946 paper by an economics professor, Evsey Domar, who disavowed it in less than ten years. Yet, thanks to the fog of the Cold War, it continued to be the basis (the Harrod-Domar Model was re-bottled as ICOR) for lending to 138 countries, of which just one - Tunisia - could be claimed as a success story.

Easterly then turns to `capital fundamentalism` - the belief that increasing buildings and machinery is the fundamental determinant of growth - and its conflict with Robert Solow`s argument that the only only source of growth in the long run is technological change. But Solow`s model too was based on just the study of USA and not on any tropical country. He then tries to see if there has been any correlation between growth of education and GDP-growth (there isn`t), population-growth vs. GDP (again, nil) and discusses the futility of the conditional, `adjustment lending` by WB and IMF.

What I liked especially in this book was the way it illustrates macro-economics situtations with real, down-to-earth examples, starting with the `Intermezzo`s` with the struggles of his own ancestor, a homeless, impoverished migrant. For, `when we look at poor countries today, we see out own past poverty. In the long run, we all come from the lower class`.

I can`t remember the last time I felt so connected to anything written by an economist. And I am so glad I saw this book before it landed in the garbage-bin! :)


Easterly, William (2001). The Elusive Quest for Growth: Economist`s Adventures in the Tropics. MIT Press 2002. Amazon -

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