How Poverty Ends: The Many Paths to Progress—and Why They Might Not Continue is from Abhijit V. Banerjee and Esther Duflo (the recent econ Nobel Laureates who won for their RCT work) and I think can reasonably be read as a response to the criticisms of Lant Pritchett (probably the most vocal advocate of the line of thinking this post represents).
Key excerpts:
Economists, ourselves included, have spent entire careers studying development and poverty, and the uncomfortable truth is that the field still doesn’t have a good sense of why some economies expand and others don’t. There is no clear formula for growth.
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What, then, are policymakers left with? There are some things clearly worth avoiding: hyperinflation; extremely overvalued fixed exchange rates; communism in its Soviet, Maoist, or North Korean varieties; the kind of total government chokehold on private enterprise that India had in the 1970s, with state ownership of everything from shipyards to shoe factories. But this is not particularly helpful advice today, given that hardly anyone is reaching for such extreme options anymore.
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There simply is no accepted recipe for how to make poor countries achieve permanently high growth. Even the experts seem to have accepted this. In 2006, the World Bank asked the economist Michael Spence to lead a commission on economic growth. In its final report, the group recognized that there are no general principles for growth and that no two instances of economic expansion are quite alike. Easterly described their efforts in less charitable terms: “After two years of work by the commission of 21 world leaders and experts, an 11-member working group, 300 academic experts, 12 workshops, 13 consultations, and a budget of $4m, the experts’ answer to the question of how to attain high growth was roughly: we do not know, but trust experts to figure it out.”
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If there is a common thread, it is that the fastest growth appears to come from reallocating poorly allocated resources—that is, putting capital and labor toward their most productive use. But eventually, the returns from that process diminish, at which point countries need to find a new strategy for combating poverty.
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One very real danger is that in trying to hold on to fast growth, countries facing sharply slowing growth will veer toward policies that hurt the poor now in the name of future growth. In a bid to preserve growth, many countries have interpreted the prescription to be business friendly as a license to enact all kinds of anti-poor, pro-rich policies, such as tax cuts for the rich and bailouts for corporations.
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Looking back, it is clear that many of the important successes of the last few decades were the result not of economic growth but of a direct focus on improving particular outcomes, even in countries that were and have remained very poor. The under-five mortality rate, for example, has fallen drastically across the world, even in some very poor countries whose economies have not grown particularly fast. Credit goes mostly to policymakers’ focus on newborn care, vaccination, and malaria prevention.
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This is patient work: spending money by itself does not necessarily deliver real education or good health. But unlike with growth, experts actually know how to make progress. One big advantage of focusing on clearly defined interventions is that these policies have measurable objectives and therefore can be directly evaluated. Researchers can experiment with them, abandon the ones that don’t work, and improve the ones that do.
Yes, I list a couple more quotes from this article, but also many quotes from their Duflo and Banerjee’s book in the Appendix. I think these quotes really get to the crux of the disagreement between growth and randomista development.
From their Foreign affairs article:
“There are many ways to improve allocation, from the moves away from collectivized agriculture that China made under Deng to the efforts India made in the 1990s to speed the resolution of debt disputes and thus make credit markets more efficient. But the flip side to this is that at a certain point, the gains start to diminish. Many developing economies are now reaching this point.”
“Quality of life means more than just consumption. Although better lives are indeed partly about being able to consume more, most human beings, even the very poor, care about more than that. They want to feel worthy and respected, keep their parents healthy, educate their children, have their voices heard, and follow their dreams. A higher GDP may help the poor achieve many of those things, but it is only one way of doing so, and it is not always the best one.”
Quotes from Duflo and Banerjee
From “Good Economics for Hard Times”
“How would anyone know whether pre-1991 growth would have continued had there been no crisis and the trade barriers not been brought down in 1991? To complicate matters, trade was being liberalized gradually starting in the 1980s; 1991 just sped that up (a lot). Was the big bang necessary? We will never know unless we are allowed to rewind history and let it go down the other path. Unsurprisingly, however, economists find it very hard to let go of this sort of question.”
CHASING THE GROWTH MIRAGE
“Unfortunately, just as we don’t know much about how to make growth happen, we know very little about why some countries get stuck but others don’t—why South Korea kept growing but Mexico did not—or how one gets out.”
“Perhaps the reason why some countries, like China, can grow so fast for so long is that they start with a lot of poorly used talent and resources that can then be harnessed”
“Solow’s was what economists call an exogenous growth model, where the word “exogenous,” meaning driven by outside effects or forces, acknowledges our inability to do anything about the long-run growth rate. Growth, in short, is beyond our control.”
“The growth tide does raise all boats, but it doesn’t lift all boats to the same level—many economists worry that there may be such a thing as the middle-income trap, an intermediate-level GDP where countries get stuck or nearly stuck. According to the World Bank, of 101 middle-income economies in 1960, only 13 had become high income by 2008.122 Malaysia, Thailand, Egypt, Mexico, and Peru all seem to have trouble moving up. “
“In Indian manufacturing there was a sharp acceleration in technology upgrading at the plant level, and some reallocation toward the best firms within each industry after 2002. This appears to be unrelated to any economic policy, and is described as “India’s mysterious manufacturing miracle.”121 But it is no miracle. At its root, it is a modest improvement from a dismal starting point, and one can imagine various reasons it happened. Perhaps a generational shift, as control passed from the parents to their children, often educated abroad, more ambitious, and savvier about technology and world markets. Or the effect of the accumulation of modest profits that eventually made it possible to pay for the shift to bigger and better plants.”
“One very real danger is that in trying to hold on to fast growth, India (and other countries facing sharply slowing growth) will veer toward policies that hurt the poor now in the name of future growth. The need to be “business friendly” to preserve growth may be interpreted, as it was in the US and UK in the Reagan-Thatcher era, as open season for all kinds of anti-poor, pro-rich policies (such as bailouts for over indebted corporations and wealthy individuals) that enrich the top earners at the cost of everyone else, and do nothing for growth. If the US and UK experience is any guide, asking the poor to tighten their belts, in the hope that giveaways to the rich will eventually trickle down, does nothing for growth and even less for the poor. If anything, the explosion of inequality in an economy no longer growing has the risk of being very bad news for growth, because the political backlash leads to the election of populist leaders touting miracle solutions that rarely work and often lead to Venezuela-style disasters. Interestingly, even the IMF, so long the bastion of growth-first orthodoxy, now recognizes that sacrificing the poor to promote growth was bad policy. It now requires its country teams to include inequality in factors to take into consideration when providing policy guidance to countries and outlining conditions under which they can receive IMF assistance.123
“The bottom line is that despite the best efforts of generations of economists, the deep mechanisms of persistent economic growth remain elusive. No one knows if growth will pick up again in rich countries, or what to do to make it more likely. The good news is that we do have things to do in the meantime; there is a lot that both poor and rich countries could do to get rid of the most egregious sources of waste in their economies. While these things may not propel countries to permanently faster growth, they could dramatically improve the welfare of their citizens. Moreover, while we do not know when the growth locomotive will start, if and when it does, the poor will be more likely to hop onto that train if they are in decent health, can read and write, and can think beyond their immediate circumstances. It may not be an accident that many of the winners of globalization were ex-communist countries that had invested heavily in the human capital of their populations in the communist years (China, Vietnam) or countries threatened with communism that had pursued similar policies for that reason (Taiwan, South Korea). The best bet, therefore, for a country like India is to attempt to do things that can make the quality of life better for its citizens with the resources it already has: improving education, health, and the functioning of the courts and the banks, and building better infrastructure (better roads and more livable cities, for example).”
On climate: “Mitigation through better technologies may not do the trick; people’s consumption will need to fall. We may have to be content not only with cleaner cars but also with smaller cars, or no cars at all.”
How Poverty Ends: The Many Paths to Progress—and Why They Might Not Continue is from Abhijit V. Banerjee and Esther Duflo (the recent econ Nobel Laureates who won for their RCT work) and I think can reasonably be read as a response to the criticisms of Lant Pritchett (probably the most vocal advocate of the line of thinking this post represents).
Key excerpts:
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Yes, I list a couple more quotes from this article, but also many quotes from their Duflo and Banerjee’s book in the Appendix. I think these quotes really get to the crux of the disagreement between growth and randomista development.
From their Foreign affairs article:
Quotes from Duflo and Banerjee
From “Good Economics for Hard Times”