Wolf on Spence (and Easterly)

I agree with Martin Wolf's take on the Spence commission report on growth, and his put-down of Bill Easterly's column:

Contrary to what Prof Easterly argues, the report makes useful contributions to policymakers’ understanding. The most important is the emphasis on growth itself, underplayed by many advisers and activists in the 1990s and early 2000s. Growth is not everything. But it is the foundation for everything. The poorer the country the more important growth becomes, partly because it is impossible to redistribute nothing and partly because higher incomes make a huge difference to the welfare of the poorest.

Yet the report goes beyond that. It is based on an analysis of 13 countries that have managed growth of 7 per cent a year over at least 25 years. They are diverse: Botswana, Brazil, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Malta, Oman, Singapore, Taiwan and Thailand. India and Vietnam seem likely to join this group. These countries have not all sustained their growth: Brazil and Indonesia are important examples of backsliding. These countries are also different in many respects, notably in their size, resources and culture.

Yet, suggests the report, they shared five points of resemblance: they fully exploited the opportunities afforded by the world economy; they maintained macroeconomic stability; they sustained high rates of saving and investment; they let markets allocate resources; and they had committed, credible and capable governments.

These points are consistent with the so-called “Washington consensus” of the 1990s, which emphasised macroeconomic stability, trade and the market. Yet the report’s emphasis is different: it does not stress privatisation, free markets and free trade, while it does emphasise the role of the so-called “developmental state”.

I think Martin was ill-served by the  FT editor who chose his title.  His column bears the heading "Useful do's and don’ts for an economy set on fast growth," whereas a key point of the Spence report--with which Martin seems to agree--is that while we can agree on the key ingredients of growth, the way to achieve these varies greatly from setting to setting. 

As for Bill Easterly, I'm afraid Dingel put it best: "If you're overconfident about development, Bill Easterly pokes holes in your arguments. And if you're modest, he makes fun of you." 

Comments

[minny mouse]

I am always confused by the claim that countries like China, Japan, and South Korea allow markets to function despite massive state intervention. None of the three resemble Hong Kong in terms of "free" markets.

Or it is just that they intervene relatively less than other developed countries. I always found that this was a distinction that is played down in these conversations.

[robertdfeinman]

There is still a fundamental problem with the international development community. What "works" in one time and place doesn't work elsewhere, or it stops working. Each time this happens there are ad hoc explanations given.

The "big thinkers" all try to find some overall rule which can cover everything: local control, free trade, debt forgiveness, etc. That there are so many theories just shows that none of them are very convincing.

Then the idea of "growth" gets blurred by how it is defined. Is growth measured by GDP or other macro measures, or is the criteria that which boosts the poorest the most?

Even if it is the latter, then using percentages is also misleading. Obviously high percentage growth rates are easy to achieve when the base is small. Going from $1 to $1.30 sounds great as a percentage, but how much does this really help the poor?

Perhaps there are already studies that I've not seen, but I'd like to see the relationship between elimination of poverty and the amount of democracy in a state. The measure of democracy has to be sufficiently clever to measure real democracy and not just nominal actions like elections.

By such a measure, the US hasn't been very democratic, 60% of the people favor universal health care and have for 60 years, but it hasn't happened. So much for the will of the people.

Since most people's lives are controlled by large institutions (church, education, employer) and since none of these have democratic governance looking at the choices for government officials is inadequate.

It seems that everyone in this field starts with their own ideological prejudices and then finds data to support this. No wonder progress has been so spotty.

I claim (with no data to present) that those societies which allow the will of the people to be best expressed perform the best economically. I also claim that this connection is unpalatable to the plutocrats who own and run things and to their paid lackeys who promote their interests through a barrage of theories, and that's why it's not considered.

I'm not talking about economic systems, but systems of governance.

[FT]

Dingel also said "Of course, Easterly also has a serious point to make."

[James Edwards]

Dani, you misundertood the title of the article by Martin Wolf, it is not trying to give to the readers of the article a list of dos and donts but its instead encompassing the topic of dos and donts in a debate.

[jose carlos]

on "what is good for growth is good for development", it assumes we can ALWAYS redistribute from winners to losers. plenty of reasons that is not true, right? the policy world reflects nowadays, for instance, on the environment and excluded groups --indigenous peoples in particular.
so, are oil and food prices good for amazon peoples in ecuador?
it is not that straight forward... are we going to keep talking nation-level claiming strong assumptions and lack of data?

[Jamus Lim]

I just came from a talk by Bill Easterly at Brookings that was centered on his FT column.

My beef with this claim comes from the implicit assumption that the solution to development is to simply allow individual liberty. Now, I have no problems with individual freedom. My problem is the belief that this liberalization can occur spontaneously once we recognize that this is what is required. In some ways, this seems almost tautological: Does not economic freedom simply imply getting the hell out of the interventionist policy? Perhaps it does, but we have too many examples of how letting things rip does not bring freedom to pass. Thus, even if we accept Easterly's premise that liberty is the solution, we are far from understanding the mechanisms that can bring about such liberty.

Consider Russia. What we have there today---normal country notwithstanding---is a form of wild-west capitalism where economic freedom mingles with multiple failures in the rule of law. There is a whole literature on transition economics that argues over whether big-bang or small-step (economic) liberalization is the better strategy. The literature on democratic transitions is similarly mixed in its understanding of key drivers of the process, noncredible transfers notwithstanding. Moreover, political freedom appears to be neither necessary nor sufficient for economic growth. While democracy may be a laudable goal in and of itself, the linkages between democracy and development are tenuous at best, and is much more likely to be a second rather than first-order effect.

Likewise, more than two decades of experience with Latin America and elsewhere has taught us that financial repression is widespread among developing countries. Trade restrictions are similarly common, and despite substantial progress over the past century, remain bones of contention in international economic relations. Hyperinflationary economies encourage speculation and profiteering, rather than legitimate economic activity. All over the world, we see macroeconomic policy failures that result from a poor understanding of what not to do when it comes to macroeconomic management.

Finally, the many state failures in Africa point to how social and civil conflict can drive out any semblance of economic activity and lead to breakdowns in the society and economy. These failures are potentially preventable, but require that we build institutions that can help mitigate the multiplicity of interests arising from heterogeneous actors in society. While institution-building is often a painfully slow and laborious process---with tremendous uncertainty---we do know that easing pre-conflict tensions and bringing about post-conflict stability is possible, and attainable in a remarkably short time span.

The point is that government policymakers and political-economic actors do not stand still just because individual liberty is a laudable objective, whether philosophically or pragmatically speaking. If we want to relax the constraints faced by agents in the economy in order to unlease the forces of bottom-up growth, we need to understand the institutional constraints faced by these agents operating in that economy, and in so doing, engage in governance reforms that would facilitate their private actions. After all, it is not difficult to imagine how a talented, enterprising young individual can choose to be a paramilitary leader, a robber baron, or exploitative dictator, rather than a business magnate or financial manager, if the institutional environment rewarded the former professions more richly than the latter. In order to make progress in development, we still need to understand how political economies work, and help real-world economies achieve the best institutional environment possible. This is also consistent with many of your views, Dani, on experimentation in development macro and your work on growth diagnostics.

[OS]

Those 13 countries are diverse in what sense? 9 of them are in East Asia. 7 of them have Chinese majorities or large Chinese minorities that played a key role in development. 3 of the 4 outside the Pacific Rim have populations below 3 million. So that would seem to leave Brazil as the only non-tiny, non-Pacific growth success story (terrible income inequality, anyone?). The report is interesting but let's not take the "spin" too far... it's still basically about how the rest of the world can learn from East Asia.

As for Bill Easterly, it's disappointing to see such smart people develop a chip on their shoulder and become so grumpy against everyone else (see also Stiglitz and Sachs).

[N]

Good to see Easterly's column attracting some high-profile and well- deserved criticism. I've always found his gadfly routine to be somewhat tiresome, all the more so when employed to back up a recitation of vapid libertarian dogmas (as in his FT column).

Medical experts have yet to come up with a single set of therapies or medications that can be uniformly applied to every medical condition. According to Easterly's reasoning, this would seem to suggest that medical expertise is a myth, and that the "medical expert" paradigm has collapsed. Even so, I imagine that Easterly occasionally visits the doctor.

[Dan Nicolai]

My concern about Wolf's argument is that higher incomes only "make a huge difference to the welfare of the poorest" if their incomes are the ones increasing. The radical (and increasing) inequality in most of the "success stories" calls this into question; interestingly, while Brazil may be "backsliding" in his view, its economy is finally beginning to address inequality of income opportunity.

[Ken Houghton]

"If you're overconfident about development, Bill Easterly pokes holes in your arguments. And if you're modest, he makes fun of you."

And that's why The White Man's Burden is so egregious, while The Elusive Quest for Growth was just written backwards.