Bono and so many other celebrities are touting the idea of debt cancellation for poor nations. But is this really a good policy? Easterly says no.
Countries that borrow enough money that they can’t pay it back have done so by “mortgaging the future”. Cancelling the debt, which is implicitly just more aid, is rewarding bad behavior.
After debt was relieved in the past, the countries with the most new borrowing were also the ones who received the most debt cancellation service. Thus these poorly managed governments decided they could rely on free aid that they knew would never be required to be paid back.
HIPCs received less foreign direct investment through the private sector than non-HIPCs. Yet they received more in IMF and World Bank financing. This simply shows that money-managers that are concerned about being paid back don’t put their money into HIPCs but NGO bureaucracies do invest (unwisely).
Again, Easterly and I agree that aid and debt cancellation should only be given to countries that have already made proper policy changes. Until they have a proven track record of trying to change and be responsible, there is no reason to pump money into their economies.
Sunday, November 15, 2009
William Easterly's The Elusive Quest for Growth - Chapter 6
Growth between 1982-95 was expected to be between 2.7-3.3%. Yet it ended up being near zero. During this time an average of 3-6 adjustment loans were given to poor countries throughout Latin America, Africa, and Asia. Ghana was one of only a few success stories. The rest were failures.
In some cases no one considered inflationary consequences. In the Soviet break up, aid wasn’t doled out quickly enough.
Many countries kept receiving loans even though they hadn’t followed through on policy reforms. This is sometimes simply because lenders didn’t want their ideas to be failures, so they gave loans in order for countries to pay off old loans.
Easterly and I agree that aid should only be given after good policy is made. I personally am unsure if any country should actually be giving out aid. I believe this is in the hands of private investors and that foreign countries should deal with their own sovereignty issues.
In some cases no one considered inflationary consequences. In the Soviet break up, aid wasn’t doled out quickly enough.
Many countries kept receiving loans even though they hadn’t followed through on policy reforms. This is sometimes simply because lenders didn’t want their ideas to be failures, so they gave loans in order for countries to pay off old loans.
Easterly and I agree that aid should only be given after good policy is made. I personally am unsure if any country should actually be giving out aid. I believe this is in the hands of private investors and that foreign countries should deal with their own sovereignty issues.
William Easterly's The Elusive Quest for Growth - Chapter 12
Higher corruption reduces growth, which reduces investment. Centralized corruption is a top down approach that brings in more money to corrupt officials but hurts an economy less. Decentralized hurts the economy more, brings in less money to officials, and is more difficult to kill.
Ethnic diversity, foreign aid, and commodity markets generally cause more corruption.
The keys to ending corruption are creating a high quality bureaucracy, which includes a meritocratic civil service and imposes “hard and fast” rules for government.
I believe that whether corruption is decentralized or not, punishment should be severe for corrupt officials and salaries should be raised dramatically. This would reduce the incentives for corrupt activity.
Ethnic diversity, foreign aid, and commodity markets generally cause more corruption.
The keys to ending corruption are creating a high quality bureaucracy, which includes a meritocratic civil service and imposes “hard and fast” rules for government.
I believe that whether corruption is decentralized or not, punishment should be severe for corrupt officials and salaries should be raised dramatically. This would reduce the incentives for corrupt activity.
William Easterly's The Elusive Quest for Growth - Chapter 11
This chapter was rather simple. Easterly makes a case that seven factors kill growth. These are: high inflation, high black market premiums, high budget deficits, strongly negative real interest rates, restrictions on free trade, excessive red tape, and inadequate public services.
Inflation is a tax because it reduces the value of holding money, which is a mechanism for making production more efficient. Black market premiums tax exporters because they increase input costs while prices are stuck at an artificial level. Budget deficits cause people to expect future tax hikes, thus it makes people wary of investing in an economy. Negative real interest rates clearly hurts an economy because any money put into a bank is essentially taxed. Thus, there are no deposits with which to give loans. Trade interference distorts pricing and effectively causes resources to be used inefficiently. Red tape taxes entrepreneurship. And poor public services tax future productivity because money will have to spent to do major repairs to utilities such as roads that could have been maintained consistently at a low cost.
Looking at this list really makes me wonder whether America is killing growth right now. Inflation is very possible, our budget deficit is enormous, deposits are barely earning interest, and Obama is less of a free-trader than his predecessors.
Inflation is a tax because it reduces the value of holding money, which is a mechanism for making production more efficient. Black market premiums tax exporters because they increase input costs while prices are stuck at an artificial level. Budget deficits cause people to expect future tax hikes, thus it makes people wary of investing in an economy. Negative real interest rates clearly hurts an economy because any money put into a bank is essentially taxed. Thus, there are no deposits with which to give loans. Trade interference distorts pricing and effectively causes resources to be used inefficiently. Red tape taxes entrepreneurship. And poor public services tax future productivity because money will have to spent to do major repairs to utilities such as roads that could have been maintained consistently at a low cost.
Looking at this list really makes me wonder whether America is killing growth right now. Inflation is very possible, our budget deficit is enormous, deposits are barely earning interest, and Obama is less of a free-trader than his predecessors.
William Easterly's The Elusive Quest for Growth - Chapter 5
Population alarmists believe that increasing population is going to be the cause of famine and devastation. However Easterly and I are not convinced.
He points out that no one cannot afford condoms because they are much cheaper in the long run than having children. I would point out that poor citizens might not think in this economic mindset. Also, many of these people having so many children might actually want to have children.
Easterly writes that population grew rapidly in the 19th century, but humanity survived. He argues the reason for this is that people are not deadweight to GDP, they can actually add to the economy. Over time technology has also allowed for more food to be produced on less land.
His conclusion is that since rich people invest more in education because they have a higher rate of return per child, governments should create incentives to invest in people. This will cause citizens to have less children and spend more on those few kids.
I enjoy this lambasting of population alarmism because the philosophy is so vehemently against the value of human life. Our goal should never be to reduce people. It should be to increase the standard of living for however many people that so happen to be born.
He points out that no one cannot afford condoms because they are much cheaper in the long run than having children. I would point out that poor citizens might not think in this economic mindset. Also, many of these people having so many children might actually want to have children.
Easterly writes that population grew rapidly in the 19th century, but humanity survived. He argues the reason for this is that people are not deadweight to GDP, they can actually add to the economy. Over time technology has also allowed for more food to be produced on less land.
His conclusion is that since rich people invest more in education because they have a higher rate of return per child, governments should create incentives to invest in people. This will cause citizens to have less children and spend more on those few kids.
I enjoy this lambasting of population alarmism because the philosophy is so vehemently against the value of human life. Our goal should never be to reduce people. It should be to increase the standard of living for however many people that so happen to be born.
William Easterly's The Elusive Quest for Growth - Chapter 4
Easterly writes that education without incentives is useless. If education causes people to miss out on more profitable outcomes, they will skip the education and do what is necessary to be most profitable.
He mentions that there is no correlation between education and output growth. If education spurs growth he argues that young workers should have relatively higher wages than the older population because they are the more educated demographic. However, that trend is not occurring in reality. Instead, he argues that growth causes education.
Gregory Mankiw argues that growth is dependent upon a combination of physical capital and human capital. Thus, growth cannot be forced by only one variable change.
Easterly makes the case that skills are definitely needed for growth, but that there must be proper incentives to obtain these skills.
I consistently agree with Easterly’s arguments because I too believe that aligning incentives properly is essential to development. Thus, it would be beneficial for governments to reassess what the terminal incentives are for their citizens under the current policy. Governments in LDCs should ultimately care most about growth and not about trendy fixes to growth.
He mentions that there is no correlation between education and output growth. If education spurs growth he argues that young workers should have relatively higher wages than the older population because they are the more educated demographic. However, that trend is not occurring in reality. Instead, he argues that growth causes education.
Gregory Mankiw argues that growth is dependent upon a combination of physical capital and human capital. Thus, growth cannot be forced by only one variable change.
Easterly makes the case that skills are definitely needed for growth, but that there must be proper incentives to obtain these skills.
I consistently agree with Easterly’s arguments because I too believe that aligning incentives properly is essential to development. Thus, it would be beneficial for governments to reassess what the terminal incentives are for their citizens under the current policy. Governments in LDCs should ultimately care most about growth and not about trendy fixes to growth.
William Easterly's The Elusive Quest for Growth - Chapter 9
This chapter was all about creative destruction and it being a necessity for economic growth. Implicit in the idea of advancement is leaving old technology behind. However, occasionally new technology can exist without proper incentives to use it, so growth happens slowly. In these cases, Easterly proposes that governments might create incentives to use the newest technology.
The reason America and other countries have experienced sustainable growth is due to the fact that technology builds on itself and continues to provide increasing returns to scale.
In regards to moving toward new technology, older generations generally fight the change while youth embrace change. This conflict will continue forever. Easterly argues that war sparks economic growth because it destroys old institutions and forces the demolished countries to embrace new technology.
Technology can flow to developing countries in two ways. The first way is by foreign direct investment. The second way is through imports of new machines.
Easterly argues that path dependence causes some countries to stay poor and others to stay rich. This philosophy is based on the idea that past decisions affect current choices.
Overall, the main idea is that innovation concentrates in regions, it builds on itself, and accelerates into the future.
I generally believe that government intervention in economies is undesired, but this chapter showed me that in poor countries governments could be helpful for the economy.
It seems unfortunate but just that countries must reap what their previous actions have sown. In some instances, however, outside forces could have distressed a country and caused it to fall into a vicious poverty trap.
The reason America and other countries have experienced sustainable growth is due to the fact that technology builds on itself and continues to provide increasing returns to scale.
In regards to moving toward new technology, older generations generally fight the change while youth embrace change. This conflict will continue forever. Easterly argues that war sparks economic growth because it destroys old institutions and forces the demolished countries to embrace new technology.
Technology can flow to developing countries in two ways. The first way is by foreign direct investment. The second way is through imports of new machines.
Easterly argues that path dependence causes some countries to stay poor and others to stay rich. This philosophy is based on the idea that past decisions affect current choices.
Overall, the main idea is that innovation concentrates in regions, it builds on itself, and accelerates into the future.
I generally believe that government intervention in economies is undesired, but this chapter showed me that in poor countries governments could be helpful for the economy.
It seems unfortunate but just that countries must reap what their previous actions have sown. In some instances, however, outside forces could have distressed a country and caused it to fall into a vicious poverty trap.
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