Book project about The Elusive Quest for Growth by William Easterly

Posted: November 27th, 2013

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Book Project about The Elusive Quest for Growth by William Easterly

‘The Elusive Quest for Growth’ explores the problem of the under-development of poor countries. William Easterly writes that poor countries remain impoverished despite several attempts to rid them of their poverty such as provision of economic aid and loans, forgiving loans owed to developed nations and controlling population growth. All theses solutions appear to be viable but when applied in poor nations, they fail to work. Easterly therefore proposes that the problem lies in the fact that economic principles are not applied in the policies. He continues to illustrate that the solutions fail to comply with the essential principle of economics that all people are motivated by incentives.

The author also offers practical solutions to the problems of poor countries. This book therefore analyses the underlying problems of poor nations and explains why the proposed solutions do not solve the problems. The author applies modern economic principles and his experience as a senior advisor to the World Bank in order to provide practical solutions to poor nations. The intended audience is people and organizations that want to develop policies that will alleviate poverty in developing nations. Easterly writes in an informal style in order to make the economic text simpler and understandable to all.

Part I

In the first part of the book, the author explains the importance of growth in a country. He states that the five poor countries have an infant mortality rate fifty times higher than that of the five richest countries. In addition to this, poor countries also struggle with oppression, starvation, diseases and desperate poverty. He states that poverty can be reduced and eventually ended by either redistributing wealth from the rich to the poor or through adequate and continued economic growth. For the world’s poorest nations however, sustained economic growth is a more appropriate method of reducing poverty levels.

In this section, the author analyses the economic policies that have been implemented in the attempts to eradicate poverty in Third World countries in the 50 years after the Second World War. He lists one of the mistakes that took place as placing too much emphasis on capital accumulation. Economists believed that if they increased the rate of accumulation of Third World countries, they would solve the problem of poverty. Hence, they embarked on finding mathematical calculations that would establish the increase in capital accumulation that would be necessary to reduce and eventually end poverty. This led to the transfer of foreign aid and increased direct investments in poor counties by richer Western nations.

According to Easterly, the problem with providing economic aid and loans to poor countries is that they waste it on consumption as opposed to investing it on profitable ventures. Thus, these countries are always tied to Western countries through a vicious cycle of borrowing, incurring heavy debt and asking for debt-relief. As a result, the economies of these countries continue to decline as they become excessively dependent on the rich nations for economic assistance. Easterly provides an example of Ghana whose income per capita was lower in the 1990s than it was in 1964; thus, even after gaining independence from colonialists many African countries have not achieved economic growth. Easterly also attributes the failure of economic aid and loans to the inadequacy of the conditions attached. According to the author, in most cases, economic aid is granted to poor countries based on enhancing political convenience; therefore, the economic viability of the grant to the developing country is often overlooked.

Though engineered ingeniously with the belief that they were would work, all the efforts by IMF and World Bank to lift Third World Countries from their poverty have failed. Initially, Western countries believed that if they provided capital investment to poor countries, poverty levels would decrease significantly; this principle failed. The focus then shifted on achieving growth by providing free education; again, this did not yield significant economic growth. The World Bank, IMF and donor nations then decided to emphasize on reduction of population growth; a strategy that has not produced the expected results as the population in poor countries continues to increase substantially each year despite efforts to control it.

The author provides sufficient empirical evidence to support the fact that granting economic aid and loans, leads to the continued decline of the country’s economy. An example of this is Russia, who between 1992 and 1998 received financial aid of an estimated $ 22 billion, yet despite this, its financial condition worsened. Hence, Easterly connects the failure of this efforts to the fact that World Bank, IMF and donor nations ignore the basic economic principle that states ‘people respond to incentives’. Poor countries are given aid even when they do not meet the harsh conditions imposed therefore they develop a lax attitude towards the conditions placed on them. All the proposed methods of poverty alleviation have therefore been good ideally, but have failed because they were not backed with an incentive. The author states that the newest policy of cancelling owed debt will not yield any economic benefits because the poor countries do not have an incentive for using the debt relief to invest in their future.

Part 2

Here, Easterly explores policies that might solve the poverty problem if implemented correctly. The solution is to provide incentives that are suitable to each country and economy. Here, Easterly argues for the elevation of a knowledge-based view of the economy. This view provides an incentive for the development of skills. According to this policy, the government’s involvement in reducing and eliminating poverty is essential. Poor people are not capable of it by themselves, since they are dominated by other poor individuals, thus they are not able to require the knowledge and skills necessary to get out of the poverty trap. The government should be concerted in its efforts to reduce poverty; there should be no room for corruption and bad government policies. The failure of the government perpetuates the poverty cycle, and leaves the country more impoverished.

Easterly also proposes that poverty can be alleviated through the implementation of new technologies. This process is easier in poor countries, which do not have a high level of existing technology. The absence of sufficiently developed technology contributes to the underdevelopment of these nations; hence, the implementation of new technology contributes significantly to reducing poverty. Poor nations have the option of importing capital goods from more developed nations or importing through foreign direct investment in their countries. The effectiveness of the development and growth efforts is dependent on two factors according to the author, which are luck and government policy. In the end however, government policy is the main determinant of growth in a country.

The government should adopt non-tolerant policies towards corruption. Easterly states that corruption hampers growth and increases the rate of poverty. Corruption affects various countries in different ways. Easterly gives the example of Zaire and Indonesia, which were deemed highly corrupt but exhibited different growth patterns. Due to the frailty of Zaire under poor dictatorial leadership, its economy was more adversely affected by corruption than that of Indonesia. In order to eliminate corruption, it is essential to remove the incentives that propel corrupt attitudes and actions. Many poor countries are governed by coalitions, thus are never able to arrive at a progressive solution due to the different personalities and attitudes represented within the government.

Due to these divisions, individuals within the government develop self-seeking attitudes whereby individuals try to benefit as much as possible from their power and authority and as a result, the poor remain impoverished, as the government is unable to protect and enhance their interests. In such countries, the leaders have no incentive to change their behavior and attitudes, hence the perpetuation of poverty and under-development. This explains why many poor countries are characterized by a large disparity between the rich and the poor. In addition to this, poor countries are also characterized by ethnic hatred and division. In order to reduce poverty, incentives should be put in place to enhance an equal distribution of income and ethnic unity. Measures should be put in place to control the misuse of power and economic resources by the political elite in poor countries.

In these countries, it is important to make people understand the importance of a proposed policy to the betterment of their future. For instance, it would be of no use to increase capital investment if the leaders are greedy and corrupt or if the people are oppressed and unproductive. Such capital investment would only increase the gap between the rich and the poor and thus increase poverty. Therefore, those responsible for distributing the capital investment should be guided by incentives as to why it is important to them for the country to grow, develop and become rich. The citizens of a country should also have incentives propelling them to utilize the capital investment to produce goods that are suitable for the particular market in order to accrue profits that will be beneficial for future investments.

Easterly also states that, providing free education will not result in an educated and skilled nation if the people have no incentive to learn. When people are accustomed to poverty, they are not able to see the long-term benefits of education, as they perceive their short-term needs to be more urgent. It is therefore important to enlighten this people on the opportunities that are opened through getting an education and acquiring important skills and knowledge. Like wise, giving people contraceptives does not give them a reason to want to control the size of their families. It is important for them to understand how a smaller family aids in the reduction of poverty. Providing an incentive therefore plays a key role in motivating people to act favorably towards the attainment of a certain economic goal in poor countries.

In order to enforce new economic cultures and practices in developing countries, it is important to replace old methods of doing things with new and improved methods; it is therefore not enough to remove old methods and structures, if they are not going to be replaced with new ones. If the existing knowledge is faulty, people will have to acquire new knowledge in order to phase out the wrong knowledge. Such a process may require people to tolerate temporarily the unfamiliarity or discomfort associated with change, but the incentives provided should motivate them sufficiently. According to Easterly, most incentives focus on long-term benefits and ignore any short-term inconveniences.

Efficient incentive systems should be market-based and market-guided. This can be made possible through the establishment of institutions that are focused on the implementation of growth, development and reduction of poverty. Easterly states that the government if not checked, can hinder growth through high tax rates, trade restrictions and uncontrolled inflation. The government may also hamper development by creating an environment that is conducive for corruption and an under-productive work force. The features of a good institution according to Easterly are; respect for and adherence to the Law, promotion of competitive markets, they promote free trade, have a reasonable tax rate and a stable monetary policy. Poor countries would also benefit from the establishment of institutions that uphold values such as honesty, integrity, hard work, discipline, moral uprightness and respect for other people’s rights. Most wealthy nations were founded and built on these principles.

In conclusion, Easterly states that efforts to eliminate poverty in poor countries have caused more problems than they have solved. He states that poor countries can be made prosperous if the right incentives are offered for each of its problems. He however admits that he does not have the answer as to what the right incentives for each problem could be. From the empirical evidence, the challenge is not providing solutions or formulating policies that will reduce poverty, but it is developing incentives that will compel the poor countries to work towards implementing the policies effectively. The government requires adequate incentives to invest in projects such as education, health-care and infrastructural development, as opposed to spending its funds on short-term consumption. Donors also require incentives to distribute economic aid to countries that are concerted in their efforts to end poverty as opposed to countries that are plagued by corruption or have poor economic policies that perpetuate poverty.

‘The Elusive Quest for Growth’ is based on well-researched information; therefore, it provides consistent and credible information. The author provides sufficient empirical evidence, which makes his text more comprehendible and convincing. Easterly is also sincere enough to admit that he does not have the answer to all the problems faced by poor countries, thus he does not try to give impracticable solutions, rather he explores the existing policies and why they failed. He gives a succinct reason as to why the policies failed; there were no incentives to attract their implementation. Easterly therefore provides a fresh perspective into the problems faced by poor nations in this book.