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the_elusive_quest_for_growth [2015/01/11 13:20]
will [Increasing Returns: Leaks, Matches and Traps] |
the_elusive_quest_for_growth [2019/11/08 10:39] (current)
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| ====== Panaceas that Failed ====== | ====== Panaceas that Failed ====== |
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| | [[http://abridgeme/lib/exe/fetch.php?media=epub:dan:2015_july_24_11-38-46.epub|Download epub version]] (This is still a beta feature -- the epub version may be out of date, ugly, or just not work at all. Sorry!) |
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| Easterly explains this failure in terms of a range of perverse incentives on the part both of donors and recipients: | Easterly explains this failure in terms of a range of perverse incentives on the part both of donors and recipients: |
| * Donors care about the poor in developing countries. They are therefore to withdraw aid to governments that do not deliver reform, because of the impact of this privation on the poor. In this sense, the poor population becomes an 'asset' to the recipient government: so long as it maintains a large population in poverty, donors will be forced to provide aid: there is no incentive to get people out of poverty. This is an argument in favour of greater brutality on the part of donors... | * Donors care about the poor in developing countries. They are therefore reluctant to withdraw aid to governments that do not deliver reform, because of the impact of this cut in aid on the poor. In this sense, the poor population becomes an 'asset' to the recipient government: so long as it maintains a large population in poverty, donors will be forced to provide aid: there is no incentive to get people out of poverty. This is an argument in favour of greater brutality on the part of donors... |
| * Donor institutions are generally divided into country desks, and the size, budget and prestige of the desk or department depends on the volume of aid it disburses: so the donor's decision-maker has a clear incentive to disburse loans under any circumstances, and a disincentive to cut loans significantly, even in response to non-compliance of recipients. | * Donor institutions are generally divided into country desks, and the size, budget and prestige of the desk or department depends on the volume of aid it disburses: so the donor's decision-maker has a clear incentive to disburse loans under any circumstances, and a disincentive to cut loans significantly, even in response to non-compliance of recipients. |
| * The connection of loans to policy change encourages recipients to 'zigzag' their policy. | * The connection of loans to policy change encourages recipients to 'zigzag' their policy. |
| * Non-performance of old loans is embarrassing to donors, as an admission that their policy reform programmes have failed catastrophically. There is therefore a strong incentive to provide loans to ensure that a poorly performing recipient can continue to meet interest payments on existing loans. | * Non-performance of old loans is embarrassing to donors, as an admission that their policy reform programmes have failed catastrophically. There is therefore a strong incentive to provide loans to ensure that a poorly performing recipient can continue to meet interest payments on existing loans. |
| One study claims that 1 per cent in GDP of aid in a good policy environment leads to 0.6 per cent growth in GDP, implying that this failure of structural adjustment loans to achieve an improvement in policy has cost the developing world a great deal of growth. | |
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| Easterly's recommendations are simple. Firstly, the amount of aid offered should be conditional primarily on past performance, ie proven track record: on key indicators of policy (inflation, black market exchange rate premium) and growth. Secondly, aid should increase as countries become richer and as the numbers in poverty decline. This is absolutely necessary to avoid providing perverse disincentives to growth and poverty reduction. | One study claims that aid equivalent to 1 per cent in GDP in a good policy environment leads to 0.6 per cent growth in GDP, implying that this failure of structural adjustment loans to achieve any improvement in policy has cost the developing world a great deal of growth. |
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| | Easterly's recommendations are simple. Firstly, the amount of aid offered should be conditional primarily on past performance, i.e. proven track record: on key indicators of policy (inflation, black market exchange rate premium) and growth. Secondly, aid should increase as countries become richer and as the numbers in poverty decline. This is absolutely necessary to avoid providing perverse disincentives to growth and poverty reduction. |
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| Clearly, the obvious objection to Easterly's proposals is that he argues that most aid should be given to those who need it least, and no aid should be given to those in desperate need. His assumption appears to be that the really crucial determinant of growth is policy, not aid, and that growth and poverty reduction can be achieved with good policy and no (or very little) aid. He believes that the empirical evidence bears him out: that aid is only beneficial in a good policy environment, so it is better to have good policy and little aid than lots of aid being wasted by bad policy. | Clearly, the obvious objection to Easterly's proposals is that he argues that most aid should be given to those who need it least, and no aid should be given to those in desperate need. His assumption appears to be that the really crucial determinant of growth is policy, not aid, and that growth and poverty reduction can be achieved with good policy and no (or very little) aid. He believes that the empirical evidence bears him out: that aid is only beneficial in a good policy environment, so it is better to have good policy and little aid than lots of aid being wasted by bad policy. |
