W Easterly (2001)
How can poor countries in the tropics attain standards of living approaching those of countries in Europe and North America? Why have none of the techniques tried since the end of World War II been successful? This text from a professor at New York University looks at the development solutions that have failed before suggesting alternative approaches.
Economists have attempted to help poor countries in the tropics attain higher standards of living. The failure of their policies is not the failure of economics but the failure to apply economic principles to practical policy work.
Many times over the last fifty years economists thought they had found the answer to economic growth but none of the plans to work as promised. This failure was due to all participants in the creation of economic growth not having the right incentives. The following points are made with regards to previous development schemes:
- We should not attempt to estimate how much investment a country needs for a given target growth rate. Giving aid on the basis of financing the gap between what it has and needs creates incentives against the recipient marshalling its own resources.
- Education is another formula for growth that has failed. Learning under the right circumstances is good, but targets for enrolment rates and rhetoric from international commissions do not create the incentive to grow.
- Foreign aid to finance population control should be replaced by raising the incentive to invest in people. Parents will then want to reduce the number of children they have without aid.
- Debt forgiveness grants aid to those recipients that have best proven their ability to misuse aid. Relief is futile in countries with unchanged government behaviour.
Growth failed to respond to any of these formulas because the formulas did not take heed of the basic principle of economics: people respond to incentives. Getting incentives right is a principle that has to be implemented slowly, removing the wrong incentives of vested interests and giving entry to new people with the right incentives. The way forward must be to create incentives for growth for governments, donors and individuals:
- In a democratic society with institutions that protect the rights of private property and individual economic freedoms, governments face the right incentives to create private sector growth.
- Donors should have publicly visible aid contests in which each government vies for loans from a common pool, on the basis of its track record and its credibly and publicly stated intentions.
- Private individuals face poor incentives because they have bad governments that expropriate their investments in the future. Aid that offers matching grants to the poor with increases in their own income can help correct these poor incentives.
Source: Easterly, W., 2001, The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics, MIT, Cambridge, Massachusetts, USA.
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