To Help the Poor - Essay Example

?Chapter To Help the Poor Easterly (2002) starts out by quoting a young boy in order to set the tone for the chapter and to give an indication of how children who are poor feel when people have food but do not offer them; an indication that the poor have feelings too. He points to a visit to Lahore in Pakistan on a Word Bank trip and spending the weekend visiting the village of Gulvera and other which are not as poor as other remote villages in Pakistan. He uses the situation that existed there to paint a picture of the situations facing the poor, especially women and children and sums this up in one sentence: The majority of poor people in the world live in poor nations, where women are oppressed, far too many babies die and far too many people do not have enough to eat. He stresses the point that economists and the World Bank which he represent, have great concerns about improved standards of living for poor countries which would enable people in villages like Gulvera to live better. This Easterly (2002) indicates would prevent them from being hungry and diseased. He indicates that increases in GDP per capita would translate into rising income for the poor, lifting them out of poverty. Easterly (2002) then uses the situation in Lahore to look at a number of problems facing the poorest countries compared to the richest. These include infant mortality, diseases and nutritional deficiencies. Easterly (2002) also provides an explanation of the higher infant mortality rates and provides information on the low cost per dose of oral rehydration and vaccination that would prevent these deaths and diseases; and exclaimed that despite the low cost, the extent of poverty is significant. Easterly (2002) sought to emphasize the point that wealth has positive implications for one’s health and indicates that findings suggest a relationship between infant mortality and economic growth which implies that the high death rate of infants in Africa in 1990 could have been prevented if the standards of living in was just a little higher than it was. In terms of assessing the poorest of the poor the Easterly points to how they are treated in the poorest countries of the world by the poor themselves and how they are described. Some of the countries mentioned are Tombouctou, commonly referred to as Timbuktu in Mali which is one of the poorest countries in the world and where a 1987 survey showed that 41% of children die before reaching age five. Easterly (2002) also gives some startling statistics on the calorie intake of the poorest 5th countries and the richest 5th countries, and notes the absence of famine in the richest countries while a 1/4th of the poorest countries faced famines in the last three decades. Easterly also looked at the oppression of the poor worldwide, child labor which is ignored in 88% of the countries, child prostitution and the oppression of women which takes many forms including wife beating in Jamaica. Easterly (2002) then provides a definition of poverty as: “that part of the population with incomes below $1 per day”. Easterly (2002) stresses the point that a fast growth rate will lead to fast poverty reduction as economic contraction goes along with increased poverty. Easterly (2002) also gave examples of poverty increasing significantly with severe recession in countries in West Africa as well as the effects of economic growth and economic contractions in Asia. Easterly also points to World Bank statistics that found that a change in the average income of a society led to a proportionate change in the poorest 20% of the population and suggests that the poor could improve their standard of living through the redistribution of income and economic growth. In concluding the Chapter Easterly points to the quest of improving the welfare of poor and re-emphasizes the importance of this to the next generation. Chapter 2 – Aid for Investment Easterly starts with a quote, this time from Shakespeare’s “Two Gentlemen of Verona” as to how something becomes a habit. The focus this time was on Ghana, a country which became independent in 1957. Easterly (2002) spoke of the aid being extended from the two super powers: USA and Russia, as well as fundamental aspects of growth which existed in the country at that time. At that time Ghana supplied more than half of the world’s Cocoa, had the social and other infrastructure that could lead to growth - schools, clinics and roads which are seen as fundamental to economic growth. The Nkrumah government at the time had the services of the world’s economists who thought that surfacing the road would yield high returns. However, Nkrumah had greater plans including the hydroelectric dam on the Volta River, the development of a vertically integrated bauxite industry, water transportation connecting parts of the country, fishing industry, and irrigation for agricultural purposes. All of these things it was thought would have led to growth of approximately 7% per annum. Easterly’s trip, as well as research, later found that the Volta power project was the most successful project in Ghana’s history even though the more than 80,000 persons living around the lake suffered from various water borne diseases and most of the plans for bauxite, water transport, fishing, agricultural irrigation, railways, aluminum refinery did not materialize. Instead Ghanaian’s were as poor as they were before independence. Since independence the country went through a lot of trials and tribulations including numerous military coups, famine in the 1970’s and seems to paint a picture of the very signs of poverty that Easterly (2002) had seen on his trek to other countries: malnutrition, reduction in income per capita, and low daily calorie intake. Easterly then looked at the Harrod-Domar model, which Domar later (1957) admitted was unrealistic. This is the model that countries like Ghana had been using. This model was used to determine a required investment rate for a target growth rate. The difference between the required investment rate and the country’s own savings was the investment gap, which would have to be filled by aid from the rich countries like the USA, if the targeted growth rate was to be achieved. This model seemed to offer poor countries the hope of being rich sometime in the future since they did not have much savings. Easterly went on to look at Sir Author Lewis’ surplus labor model where machinery was the only constraint. A fixed ratio between labor and machines was assumed. The essence was that growth could only take place by the accumulation of capital and so this would require investment for which a country’s savings would be insufficient and so aid would be needed to fill that gap. Lewis’s theory was a financing gap approach as was the Harrod-Domar model. Easterly then looked at Rostow’s model which required rich nations to fill the financing gap. With the fair of communism, the US decided to provide aid to a number of countries so that Russia whose economy was seen as a model would have less of a chance to influence their policies. However, like Russia, these models never worked because much of the $1trillion in aid was used to fund consumption as there was no incentive for people to save and invest. According to Easterly (2002), one critic indicated that foreign aid was necessary to enable underdeveloped countries to service earlier loans received under foreign aid. The conclusion is that the idea of aid to investment to growth is valid but saving is necessary for further investment. As suggested by Bhagwati (1966), the way to avoid the problem of too much debt which so many countries found to be one of their major problems to increase the taxes in order to generate savings for its citizens. It was found that countries in Asia that got the least aid were the ones that showed some signs improvement in living standards. Easterly concludes with a brief introduction to the Solow Growth Model. Chapter 3 – Solow’s Surprise: Investment is Not the Key to Growth Easterly, as is usual starts with a quote, this time from Nikela Khrushchev which is bound to be an indication of what is in the chapter. Easterly (2002), looks at Solow’s theory of growth for which the conclusion was a surprise. The essence of the model is that it is technology and not investment in machines that will result in growth in the long run. Easterly then points to Solow’s article of 1957, which showed how technological change impacted positively on growth in the US in the first half of the 20th century. Solow indicates that continuously adding machines will soon lead to diminishing returns to scale and that savings will not help to sustain growth. Though high savings will lead to higher income, neither will sustain growth. The only thing that will lead to growth in the long run is an improvement in the way we do things - technology. Easterly (2002) points to what we know to be division of labor where each worker concentrates on what he does best (specialization) instead of trying to do all the tasks that lead to producing the whole product, for example, a car. This not only saves time but increases productivity per person and therefore growth in GDP per capita. Easterly then looks at the Luddite Fallacy which suggests that labor saving devices are bad because they put people out of work. However, more output per worker means more income per worker if production is increased using the same amount of labor. When Solow’s model was applied to the tropics it fell down badly. The expectations were that capital accumulation would allow them to grow faster in the short-run and that technology would take them further in the long run. The countries that are at the bottom would grow faster and later their national income would converge towards those of the richer countries. This would occur because the higher returns on investment would lead to investment flowing from rich countries to poor countries. This did not happen. Some of the reasons that were given include political instability, corruption and risk of expropriation but Robert Lucas would have none of those explanations. Paul Romer looked at data between 1960 and 1981 and concluded that poor countries were not growing any faster than rich countries. As a matter of fact, he indicated that those were the best years for poor countries. They were doing worst before then and worst after the period. Romer found out that rich countries had done better than poor countries in the last half century. Experiences contradicted Solow’s model of the convergence of nations. Views including those of Lant Pritchett, the historian Angus Maddison, William Baumol, Paul Krugman, AlwynYoung, and Peter Klenow and Andres Rodriquez-Chen were brought to the fore and assessed. While Young’s calculations found that growth in gang of four (Korea, Taiwan, Singapore and Hong Kong) was mainly due to capital accumulation and less to technological progress. Klenow and Rodriquez-Chen redid Young’s calculation and found the opposite. Easterly (2002) concluded that variations in capital growth does not explain output growth. He looked at various examples of Asia and Africa and showed startling differences in growth in output resulting from massive capital investment. Another prime example was an 8% growth in Tanzania which resulted in output falling by 3.4% per annum. However, with this example came the explanation as to some of the reasons it did not work. These included government policies and the fact that the manufacturing plant may not be operational for several reasons as was the case of a shoe factory there. However, a study done in Singapore in 1997 indicated that technological growth was central to high growth in output and arrived at the same conclusion for the other three gang of four. This supported Klenow and Rodriquez previous findings. Easterly (2002) ends with high hopes for the application of the Solow model to poor countries, with the addition of human capital as one component in the model. References Easterly, W. (2002). The Elusive Quest for Growth: Economists Adventures and Misadventures in the Tropics. USA: MIT Press. Read More

 

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