The+Elusive+Quest+for+Growth+Economists'+Adventures+and+Misadventures+in+the+Tropics

here's what the other chapters say in brief:

Part 1: there have been a bunch of ideas that were through to be the miracle drug that would bring growth and development to poor countries. None of them have worked because they've ignored the role of incentives:

Ch2: investment in capital accumulation does not promote growth ch3: transitional capital accumulation (the poor will catch up with the rich because capital is subject to diminishing marginal returns) does not promote growth. ch4: education does not promote growth ch5: population control does not promote growth ch6: conditional lending does not promote growth ch7: debt forgiveness does not pomote growth (i think - it didn't actually read 6 or 7

Part 2: [ONLY READ THIS SECTION IF YOU'RE PRESSED FOR TIME] here he actually lays out his own theory - that policies must be designed to respond to incentives. There's a role for government intervention, but it shouldn't distort incentives.

ch.8: shows how in some cases there are increasing returns, but that in these cases, government interventions may be needed to overcome collective action problems. Specifically, while knowledge is vital for growth, it is (1`) subject to leaks (factory secrets tend to get leaked so my investment in knowledge to learn them won't pay off), (2) subject to matching -- following the logic of the weakest link, people want to work with the most skilled people possible because they're only as strong as the weakest member of the firm -- so knowledge tends to cluster (mostly in big western cities) - leading to brain drains and uneven development, and all of this causes (3) poverty and prosperity traps that are self reinforcing because knowledge has increasing marginal returns. This explains why countries have become more rather than less unequal over the past 2 centuries. - Show quoted text -

Hi all--A quickie summary of Easterly Ch. 2 since no one apparently was assigned it. It's actually a pretty fast read (though I have a mere 6 chapters left, along w/ several other readings--ha!). For whatever it's worth, then, here's the first chapter, and if I get to others I'll send them. Economists have long bought the theory that growth will be proportional to equipment (“machines”) which results from investment, and therefore, to spur growth, donor countries had to fill the gap between the recipient country’s savings and the needed investment. This was a faulty theory and dropped out of the academic literature pretty early on but continued to guide the international financial institutions and aid strategies for decades. The theory was based on the Great Depression and early growth of the USSR, in which labor was ample so the missing ingredient was machines. But it ignores the fact that if labor is abundant, people will use more labor-intensive modes (lower-tech). And it violates the principle--the main point of the book I think--that “people respond to incentives.” For example if you tied aid to a country’s savings rate, that might encourage more domestic savings and investment; but instead the “financing gap approach” rewarded countries with lower savings (because it saw a bigger gap that aid had to fill).

Brief summary of Easterly, Ch. 3  Basic argument here is that it’s technology, not capital (i.e., machinery) that leads to growth. If you keep adding machinery you get diminishing returns--more and more machinery per worker doesn’t add up to more production, unless technology improves along the way. Similarly, increasing savings (which gets translated into investments in machinery) won’t do much either. Contrary to the Luddites (interesting story about the original Luddites by the way p. 53), increasing technology doesn’t put people out of work overall; instead it increases productivity per worker. Yet even the idea that capital investment increases short-term growth (i.e. before you hit the point of diminishing returns) doesn’t hold up well to empirical evidence either. Rich countries have mostly gained their wealth in the last two centuries, as the gap between rich and poor countries has increased. Capital investment really doesn’t explain this. “Multiplying machines when incentives for growth were lacking was useless” (68). Rich countries have had higher growth because of improved technology, which offsets the diminishing returns of increased capital investment, and therefore they’ve had increased capital investment, but that investment is not the cause.