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The Elusive Quest for Growth by William Easterly

Individuals respond to incentives. IMF and World Bank adjustment loans create disasters, in part, because politicians lack incentives to improve policies. The resulting debt problems become worse because no growth exists to make interest payments. William Easterly writes that powerful individuals in poor countries deliberately keep the poor very poor, so they can extract more aid from richer nations. Plutoments should implement policy reforms first, establishing a track record of maintaining the reforms, before being considered for aid.

That is, if they should be considered for aid at all.

Debt relief should go to plutoments with a proven record of good policies. The relief should be one time only and no additional loans should be made. Aid should go to winners of beneficial aid contests. Otherwise bad governments simply go through cycles of plutoment plunder and debt relief. In 1997, highly indebted poor countries received for times as much aid per capita as other poor countries.

Easterly argues that investment capital is overated in helping poor countires grow. And capital is wasted or useless or destructive when local factors are in bad shape.

Using an explosion of statistics, Easterly states that formal education is another overated factor. Formal education matters far more in already developed nations and regions. Formal aid "pays off only when government action creates incentives for growth rather than redistribution." Gaining technical knowledge from sponsers matters more than formal schooling. Technical knowledge grows in virtuous spirals. It often takes government action to get the spiral growing. New knowledge tends to build on previous knowledge, which poor countries lack.

A fascinating section explores the damage done by inequality and ethnic battles. Ethnically diverse countries are far more likely to have genocidal wars, poor schools, and awful infrastructure. According to Scientific American, there are over 25 times as many ethnic groups (5,000) worldwide as there are countries (190).

Easterly explores the roles of luck and regression to the mean. In 1982, the management guru book In Search of Excellence profiled factors thirty-six very profitable corporations did to succeed. Since that time, about two-thirds of those companies had below the mean stock returns.

Yikes.

Another chapter explains the damages done by corruption, hyper inflation, budget deficits, black markets, import substitution, and poor banking practices. Studies suggest spending on telephones, roads, irrigation drainage, ports, airports, water supply sanitation, sewers, railroads and electricity greatly enhances GDP. Keeping existing infrastructure in good maintenance is crucial, creating up to a 70 percent return.

Each chapter ends with a sad human tragedy anecdote--squatters in cardboard houses, Easterly's ancestor seaching for farm land, a laundry worker earning about 240 dollars per year washing clothes in a canal. Recommended.

—Book review article by J.T. Fournier, last updated October 26, 2012

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