William Easterly: The Elusive Quest for Growth - Essay Example

April 23, William Easterly: The Elusive Quest for Growth Chapter 9 Summary This chapter explains that the developing or under-developed countries which have previously not invested much in the technological aspects of progress can skip some vital steps in order to come into the same phase as developed countries. This is possible because of the feature of technology that it out dates as soon as new breakthrough is made. According to the writer we are now living in the age of technology and growth is very much dependent on it. The rate at which technology is changing is significant here. The technological advancements are increasing day by day and the technology is becoming more and more efficient. This not only increases the efficiency of these machines but the costs of installation have also been reduced. The writer gives examples of advancements in internet, agricultural and health sectors. Later it is explained that the growth in technology is actually extremely good for economic growth. The new technology which comes in actually makes the older one obsolete and out of date. As a result, this ends up being a drawback, as new technology ends up replacing old technology. An excellent example of the history of light is mentioned here. From the campfire discovered thousands of years ago passing through candles and bulbs, today’s fluorescent lights are 143,000 times brighter than the campfires (Easterly 175). These dramatic advancements in technology have been visible over centuries and this has increased efficiency manifold. With the presence of technology the people should also have the incentive to use it. Technology without incentive may be useless and this has been seen on multiple occasions in history. The romans had the resources and the technology but they did not progress. Similarly the Chinese were the first to have access to a variety of technologies before the Europeans could even have imagined. However, they lacked an incentive for its usage and as a result the technologies remained stagnant for a long period of time before they were taken over by others. Another feature which is important along with technology is education. It has been witnessed that the productivity of workers in developed economies may be similar but their income levels may be different. A very significant reason behind this is that the different educational levels cause different levels of usage of the technology. The important factor for technological progress and for economic growth is the incentive to use these for the betterment. For the poorer countries the absence of technology can be both an advantage and a disadvantage. The disadvantage can be in a sense that the absence of experience of technology can result in a reversal of effect. This is because the workers will be semi-skilled or unskilled as far as the expertise is concerned. This is because they will be inexperienced in the handling of technology. They will not be able to handle the machinery and the return over the technology will be much lower than to the skilled workers of the developed nations. The advantage will be extremely essential for the developing or under-developed countries because the installation of the technology and its implementation will be extremely cost effective. The will directly have to install the technology and it will be much easier instead of upgrading the old technology or replacing it. Chapter 10 Summary This chapter begins with the examples of the incidents in the lives of three women. These women represent the poverty stricken people from the poorer nations of Zambia, India and Vietnam. The three families face similar situations where the death of a working person results in the isolation of the family where they are now dependent on others for survival. They are thrown into the poverty trap by the human disasters which cannot be controlled. The poor households find themselves very vulnerable to shocks such as human disasters. Such households do not have any collateral and in situations of shock they are forced to use up their liquid assets any of them which they have. Thus, such shocks leave them into a deep pit of poverty. They are unable to climb out. Instead they keep falling further. Economies behave in a similar way. If there expertise or skilled employees are unavailable or are wiped out they do not have sufficient backups and as a result are affected by such a shock. Therefore, such an economy can face a severe crisis when this happens as they do not have the chance to implement new technology train more workers and are robbed of the basic means of growth. It is for these reasons it is often said that the poorer countries are vulnerable to natural disasters as they are robbed of their resources. Many poorer nations have been struck hard by natural disasters at various times. According to economists the growth of an economy are based on some deterministic factors. To begin with the economy may find it very difficult to progress if it is already stuck by a natural disaster or is in a period of very low economic growth. On the other hand it may progress easily if it is already in the same phase. Thus what is critical here to understand is the role of luck in the society. For example, if the economy is progressing in a steady rate then this will allow the people to invest more in the technological development and growth of the economy. Therefore, growth very much is dependent on the initial situation as well as the expectations of the people (Easterly 199). Sensitivity to economic expectations is also significant. Accidental changes in the economy can therefore create something which is out of the ordinary. It is the expectations of the economy or the incentives which determine the growth in the economy. The fit economies survive in the long run. This idea can be related to Darwin’s theory of evolution which can be further linked to the theories of Adam Smith, the economist. The poorer countries also have a varied rate of economic growth when compared to the richest countries. This also affects the expectations of the people and brings shifts in their incentives. The varying growth rates do have a significant impact on the incentives of the people in the economy. The instability of growth rates can actually be the result of the weak workforce of the poor countries and as a result they are unavailable to maintain the growth rates. Although many economists will deny the idea of luck influencing the fate of economies it cannot be denied that this does has the influence which is significant enough. Government policies play an important role in the running of the economy and this together with incentives for the people influence the short run and long run economic growth. Chapter 11 Summary As it is said that bad luck can kill people and so can bad governments can kill the economy. As it has already been explained by the author in the previous chapter that the incentives do affect economic growth and they are very sensitive. For example lowering present consumption for greater incomes in the future and other such governmental policy induced incentives can affect the rate of growth in the economy. Israel is a very good example for all economists when studying the problem of inflation and its solution. Israel was suffering from high inflation period from 1973-1985. One of the major reasons for Israel facing this crisis was the OPEC problem of 1973. Simultaneously, at the same time Israel was also at war. Like the practices of other nations in war Israel started printing notes in order to overcome the financial crisis and strikes. Printing of excessive money results in price hikes and also wage hikes. Governments initially issue excessive notes and money in order to fund the increasing budget deficits. However, although in the short run this does fulfill the tasks of controlling the budgetary deficits in the long run it creates some problems. To begin with high inflation is very easy to start and then very difficult to manage. Firstly the indexes of the prices go up causing the laborers to demand more. Then even if the inflation goes down the wages are still maintained at the previous inflation rates and as a result causing further price hikes. This will increase inflation rather than resulting in a decrease and the government will have to print further notes in order to finance the deficit. Later this inflation was put under control by Bruno and his team. However, the point still stays that the governmental policies can harm or change the incentives of the people and for the economy. Such government policies do create a bad and poor incentive for the people. They cause the people to spend more and more money causing further inflation. The mindset of the people requires them to continue spending and as a result this ends up turning into hyperinflation. As it is commonly said that inflation is a tax to production (Easterly, 220). This is because money acts as an important mechanism and helps create stability in the monetary system of the economy. During periods of high inflation people are more consumed in saving their assets and incomes instead of looking forward to investment and increasing their wealth. This attitude causes the economy to suffer and fall deeper into the holds of inflation. This is a very common problem which was faced by Israel and many other countries throughout the world. Some government policies also result in a high black market evolving for the exchange of currencies and commodities. This has been a common issue in many countries that the government has put a legal restriction on the holding of foreign currencies as it causes the depreciation of the currency. This results in the advent of a very strong black market for foreign currencies especially the dollar. Governments are very significant role in the progress of the economy. Any weaknesses or variations in the policies of the government are reflected in the growth rate of the economy. High budget deficits also turn out to be bad indicators and incentives for the economy. It acts as an indication to the people that the taxes might be raised in the near future. As a result, they start spending more causing the prices to rise higher and thereby resulting in inflation. The result of these unstable government policies is that the people are uncertain whether or not to invest their funds and assets in order to earn profits to increase wealth. The features which come out from these discussions is that the government has to pay heed before making some decisions as they are entirely accountable for the stage in which the economy is in. Therefore, these policies by the government have always have had a great impact on the economy. The factor which is most repeated throughout this chapter is that people respond to incentives. Whether these incentives have a positive impact or a negative it depends entirely on the government policies and the view point and functioning of their initiatives as we have already witnessed. The following steps taken by the government end up being poor incentives for growth: High inflation, high budget deficits, high black market, strongly negative real interest rates, restrictions on free trade, excessive red tape and inadequate public services. The problem which cannot be denied is that at times the government does take decisions which may be correct in the short run but in the long run may not always be a successful in the long run. There are plenty of situations in this world where there is a risk of the formation of a poverty trap. All the above mentioned steps should be avoided by the government and instead it should make policies that support production and economic growth in order to improve the standard of living of the masses. Chapter 12 Summary Higher corruption reduces growth, which reduces investment. Centralized corruption is a top down approach that brings in more money to corrupt officials but hurts an economy less. Decentralized hurts the economy more, brings in less money to officials, and is more difficult to kill. Ethnic diversity, foreign aid, and commodity markets generally cause more corruption. The keys to ending corruption are creating a high quality bureaucracy, which includes a meritocratic civil service and imposes “hard and fast” rules for government. I believe that whether corruption is decentralized or not, punishment should be severe for corrupt officials and salaries should be raised dramatically. This would reduce the incentives for corrupt activity. For Easterly, corruption is one of the larger obstacles for economic growth. Nevertheless, the author points out that there is a distinct difference between centralized and decentralized corruption. Decentralized corruption drives a higher rate of theft?, given those receiving bribes compete to obtain their share of spoils. This type of corruption, Easterly proposes, can have extremely harmful economic effect in the growth of a country. Such decentralization also makes corruption all the more difficult to punish. In a system of centralized corruption, the corrupt individual cannot ask for bribes past a certain level, because he or she knows there are economic limits that he cannot pass. The effect of this type of corruption is less negative upon growth. However, as Easterly carefully explains, “Governments can kill growth.” Inflation, high taxes, supply-side regulations and controls, and trade and investment restrictions are all policy tools that retard and inhibit people’s free ability to find market avenues for economic betterment. The politically regulated and manipulated economy inevitably creates an environment of corruption and privilege that wastes people’s time, labor, income, and resources in just trying to bribe those with power. The political powers become wealthier and the society becomes that much poorer. Chapter 13 Summary The world is set to be divided in portions. Not all people are alike and not all of them think the same. The more divided the societies are the more the incentives the government has to redistribute the income between the factions. On the other hand in cohesive societies the government is provided with the incentives to move towards growth. According to Easterly the politicians are also humans and they may also act to the incentives which are visible to them in situations of crisis. Politicians are often blamed for corruption and are accused for spending a lot of public wealth on their luxuries and expenses thus increasing the taxes simultaneously. However, blaming them for introducing steps which redistribute income are actually not correct because these politicians may actually want economic growth to take place if they are really interested in more funds. Polarizations defeats the purposes of the government as it creates a conflict of purpose for the government which in turn causes a lapse in correct decisions. The problem which arises amongst people is that they are interested in their own benefits and interests. They are working along their own budgets and do not consider the benefits and costs which are caused to the others based on their own decisions. Also with different interest groups a war of attrition results where each and everyone is looking out to defeat the others. The war of attrition continues between the interest groups as one looks forward to defeat the other. Also at times when stuck in such a war they overlook the incentives which may benefit them and may stand up against them. This occurs because of lack of knowledge and awareness. Chapter 14 Summary Once again cities of Pakistan are mentioned and in this case it is the capital of Punjab, Lahore. The conditions of Lahore as a busy metropolitan city of Pakistan are mentioned here. After describing the wonderful image of Lahore the flaws are highlighted the most primary of which is inefficiency of governments, lack of education and proper healthcare facilities. The flaws are mentioned is a very sarcastic manner. To begin with the governments of Pakistan have been fluctuating between democratic and military dictatorships. Thus, the variations have caused various governments to pursue a different range of goals resulting in a flaw in the functioning of the economy. There have been many visible flaws in the public sector in Pakistan. The standard of education has fallen greatly and the public education system is doomed. There are no opportunities for the poor people and they are bound to study in private schools or not study altogether. Besides this the public health setup has not been able to provide sufficient assistance to prevent even simple curable diseases as well as campaigns like polio and measles etc. The point which Easterly is trying to point out is that what needs to be corrected is the belief in the unity of the interests in order to bring growth favorable to all. The problems faced by most tropical and third world countries are the lacking of the positive incentives required for growth. Such countries are in a turmoil and it is necessary for the bigger stronger nations to help them and work towards common goals. Lastly, Easterly – perhaps due to being an economist – does not show an awareness of the role of politics on aid policies, nor how his suggestions may be practical in real life politics. Easterly seems to treat the World Bank and International Monetary Fund (IMF) as neutral entities seeking to do their best to help the poor. Thus his main criticism of these organizations is that they’ve been trusting in the wrong policies (panaceas) and thus that’s why development has been such a failure. Throughout the book, it has never seemed to occur to him that power politics have been involved in various policy failures. The power structure of the World Bank and IMF is after all dominated by the developed countries which give them most of the say on the amount and the beneficiary of aid from these two organizations. Furthermore, aid was undeniably dictated by Cold War realities before the fall of the Soviet Union. For example, a reason why aid was disbursed to many corrupt governments that would never have used it properly was simply due to the fact that a country supported the U.S. during the Cold War. Thus, it wasn’t always a failure to understand that there is a need to get the incentives for growth right. In addition, Easterly’s chapter on factionalism (Chapter 13), while theoretically correct, doesn’t help politicians much. He maintains that too much ethnic diversity in a country hinders growth. While no doubt true, what would this mean politically? Is Easterly suggesting that that independence be granted to ethic groups so there would be more homogeneity which is more conducive to growth? Read More