Introduction Title very important: “quest for growth” like magical elixir Title very important: “quest for growth” like magical elixir Three sections: Three sections: I. Why growth matters I. Why growth matters II. Panaceas that failed II. Panaceas that failed III. People respond to incentives III. People respond to incentives Themes to remember: Themes to remember: “people do what they get paid for and don’t do what the don’t” “people do what they get paid for and don’t do what the don’t” “People respond to incentives” “People respond to incentives”

I. Why Growth Matters Ch.1: To Help the Poor Why should we care - the problems of poverty Why should we care - the problems of poverty Why growth and not other factors Why growth and not other factors

II. Panaceas that failed Ch. 2: Aid to Investment “financing gap” theory (Harrod-Domar): “financing gap” theory (Harrod-Domar): History: depression and cold war History: depression and cold war Aid Aid Investment & Self-sustained growth & Self-sustained growth Increased Savings

II. Panaceas that failed Ch. 2: Aid to Investment Didn’t really work…growth didn’t happen! Didn’t really work…growth didn’t happen! Academic “heyday” 1960s - 70s Academic “heyday” 1960s - 70s Lives on in IFIs Lives on in IFIs Investment considered still “necessary” if not “sufficient” Investment considered still “necessary” if not “sufficient”

II. Panaceas that failed Ch. 2: Aid to Investment Empirically proven wrong: Empirically proven wrong: Aid Investment Aid Investment Investment Growth Investment Growth Investment not “necessary” for growth Investment not “necessary” for growth Incentives wrong, end its use! Incentives wrong, end its use!

II. Panaceas that failed Ch. 3: Solow’s Surprise: Investment is not the key to growth Solow’s theory: Solow’s theory: the only possible source of growth in the long run is technological change. the only possible source of growth in the long run is technological change. Solow’s view in cross-country differences: Solow’s view in cross-country differences: the only reason some countries are poorer than others is that they have started with very little machinery; the only reason some countries are poorer than others is that they have started with very little machinery; poor tropical countries will have more incentives to grow rapidly than the mature temperate economies that growing at the rate of technical progress. poor tropical countries will have more incentives to grow rapidly than the mature temperate economies that growing at the rate of technical progress.

II. Panaceas that failed Ch. 3: Solow’s Surprise: Investment is not the key to growth The growth that wasn’t The growth that wasn’t Romer used data on a sample of 58 tropical countries between and demonstrated that the Solow’s prediction failed and the poor countries did even worse than the rich countries did, both before and after these years. Romer used data on a sample of 58 tropical countries between and demonstrated that the Solow’s prediction failed and the poor countries did even worse than the rich countries did, both before and after these years. The maximum per capita income has grown strongly over the last half century, while the minimum per capita income has almost stagnated with a lower rate in 1998 than in The maximum per capita income has grown strongly over the last half century, while the minimum per capita income has almost stagnated with a lower rate in 1998 than in 1950.

II. Panaceas that failed Ch. 4: Educated for what? 1990 World Declaration on Education for All 1990 World Declaration on Education for All Education ensures “a safer, healthier, more prosperous and environmentally sound world contributing to social, economic and cultural progress, tolerance and international cooperation” Education ensures “a safer, healthier, more prosperous and environmentally sound world contributing to social, economic and cultural progress, tolerance and international cooperation”

II. Panaceas that failed Ch. 4: Educated for what? Education explosion: Education explosion: By 1990, primary enrollment reached 100 percent in half of the world’s countries By 1990, primary enrollment reached 100 percent in half of the world’s countries Between the median college enrollment rate of the countries of the world increased more than 7 times, from 1 percent to 7.5 percent. Between the median college enrollment rate of the countries of the world increased more than 7 times, from 1 percent to 7.5 percent.

II. Panaceas that failed Ch. 4: Educated for what? Where is all the education gone? Where is all the education gone? The response of economic growth to the educational explosion was little or none. The response of economic growth to the educational explosion was little or none. Studies show that the median growth rate of poor countries has fallen over time. Studies show that the median growth rate of poor countries has fallen over time.

II. Panaceas that failed Ch. 5: Cash for Condoms On why there’s no incentive to have unwanted babies!

II. Panaceas that failed Ch. 5: Cash for Condoms Malthusian fears belied Malthusian fears belied Population growth due to ‘incentive’ to have large families – that changes with higher incomes Population growth due to ‘incentive’ to have large families – that changes with higher incomes Development is the best contraceptive Development is the best contraceptive

II. Panaceas that failed Ch. 6: The Loans That Were, The Growth That Wasn’t Needed A hard nose for “Good Policy”

II. Panaceas that failed Ch. 7: Forgive us our debt Donors create perverse incentives Poor policy performance rewarded Poor policy performance rewarded Poverty rewarded Poverty rewarded Corruption did not matter Corruption did not matter Need to build incentives in aid policies for ‘Good Policies’ to be followed. Need to build incentives in aid policies for ‘Good Policies’ to be followed.

III. People respond to incentives Ch. 8: Tales of Increasing Returns: Leaks, Matches, and Traps Q. If Technology is the panacea to growth, why doesn’t poor countries adopt advanced technology? Solow’s Flaw- fixed rate of technological progress Solow’s Flaw- fixed rate of technological progress Knowledge (K) and increasing returns Knowledge (K) and increasing returns Intrinsic Characteristics of K Intrinsic Characteristics of K Leaks, Matches (Skills) and Traps Leaks, Matches (Skills) and Traps Vicious and Virtuous Circles- complements, substitutes and path-dependence Vicious and Virtuous Circles- complements, substitutes and path-dependence Remedy: good policy, but policies alone are not enough Remedy: good policy, but policies alone are not enough

III. People respond to incentives Ch. 9: Creative Destruction: The Power of Technology Creative Destruction: boon (poor) and bane (rich) Creative Destruction: boon (poor) and bane (rich) Leap-frog / Resistance (vested interests) Leap-frog / Resistance (vested interests) Incentives to Invest in K and Skills are low: Incentives to Invest in K and Skills are low: Obsolescence and in-appropriable (tension) Obsolescence and in-appropriable (tension) Market failure in a free market economy Market failure in a free market economy Path-dependence and luck Path-dependence and luck Good Policy, to create incentives and Luck Good Policy, to create incentives and Luck

III. People respond to incentives Ch. 10: Under an Evil Star Q. Why Luck Is Important? Disturbs the time to Take Off: Disturbs the time to Take Off: Disasters, Terms of Trade and War Disasters, Terms of Trade and War Other factors: Other factors: intangible factors, industrial country growth intangible factors, industrial country growth Roles: Roles: Luck can explain short term fluctuations Luck can explain short term fluctuations Policies and fundamental factors explain the long-run Policies and fundamental factors explain the long-run

III. People respond to incentives Ch. 11: Governments Can Kill Growth Growth is sensitive to the incentive of lowering present consumption in return for future income. Anything that affects this incentive affects growth Growth is sensitive to the incentive of lowering present consumption in return for future income. Anything that affects this incentive affects growth High inflation High inflation Creating a high black market premium Creating a high black market premium Kill off banks Kill off banks Closing the economy Closing the economy

III. People respond to incentives Ch. 12: Corruption and Growth Rating Corruption and Its Consequences Rating Corruption and Its Consequences International Credit Risk Guide International Credit Risk Guide Varieties of corruption affect growth Varieties of corruption affect growth Decentralized Decentralized Centralized Centralized Polices to control corruption Polices to control corruption Set up quality institutions Set up quality institutions Establish policies that eliminate incentives for corruption Establish policies that eliminate incentives for corruption

III. People respond to incentives Ch. 13: Polarized Peoples Factions explain part of poor growth attributable to government policies Factions explain part of poor growth attributable to government policies Inequality and growth Inequality and growth Inverse relationship between redistribution and growth Inverse relationship between redistribution and growth Choices of the Oligarchy Choices of the Oligarchy Ethnic polarization Ethnic polarization Foreign aid oblivious to ethnic polarization Foreign aid oblivious to ethnic polarization Countering Polarization Countering Polarization Independent institutions Independent institutions Middle class consensus Middle class consensus

Conclusion Central Theme I: Growth and Poverty Trends in worldwide poverty and world distribution of income still subject to dispute: Trends in worldwide poverty and world distribution of income still subject to dispute: Pratchett: Divergence! Pratchett: Divergence! Sala-i-Martin: Convergence! Sala-i-Martin: Convergence! Milanovic: Increase in Inequality Milanovic: Increase in Inequality

Central Theme II: Incentives Governments Governments Donors Donors Private Individuals Private Individuals

How well-supported is Easterly‘s argument? Summarizes trends in economic growth theory Summarizes trends in economic growth theory Provides examples of positive externalities of knowledge, education, positive expectations Provides examples of positive externalities of knowledge, education, positive expectations Provides examples of negative externalities of bad governance and political conflict Provides examples of negative externalities of bad governance and political conflict

How well-supported is Easterly‘s argument? Poses important questions, does not provide many answers. Poses important questions, does not provide many answers. Does not discuss priorities and trade-offs between different recommendations. Does not discuss priorities and trade-offs between different recommendations. Open question: How to design a development strategy? Open question: How to design a development strategy? How to “get incentives right“ for governments? How to induce institutional change? How to “get incentives right“ for governments? How to induce institutional change?