The Elusive Quest for Growth (2002) by William Easterly is an excellent account of the difficulties of economic development. Easterly looks at various aid programs and how they have not succeeded. He believes this is fundamentally because they ignored the basic economic truth that people respond to incentives. Easterly worked for the World Bank for a long time and is now an academic economist. He has masses of experience and knowledge of his domain.
First the Harrod-Domar model of how a lack of capital was holding back economic development is looked at and shown to have been a failure. Next the Solow model of technology is dismantled. Easterly then looks at how education was seen as a panacea and also, surprisingly, doesn’t deliver growth. Easterly then looks at population control and how fertility changes have failed to deliver growth as well. Then loans and their failure to speed development are examined.
Easterly also points out that predictions of GDP growth are terrible. He then looks at how government policies kill growth. The remarkable point is made that it took a long time, probably until the 1970s or 1980s that many development economists looked at how politics and governments interacted with growth. Remarkable Easterly doesn’t turn this around and look at how aid was often given out for political purposes to buy favour during the Cold War rather than as something intended to purely help growth.
He states that high inflation, high black market premiums and high budget deficits that lead to the expectation of some method of reducing debt that will hurt growth. The book also looks at corruption and how weak governments with decentralised corruption are the worst for growth where as governments with centralised corruption such as that in Indonesia have seen high levels of growth. Ethnic diversity is also shown to be correlated with weaker growth.
The book is really strong. It dismantles a number of theories as to why different countries have developed and different rates and why it’s been so hard to boost the wealth of the poorest countries. It’s definitely worth reading for anyone interested in development economics.