W. Easterly

Journal of Economic Literature 44, 1 (2006), pp. 96-105

 A Summary

In a nutshell: “Big-Push” development economics such as that advocated by JS is not an effective way of helping the developing world. Rather a step by step approach is needed. Sachs advocates large scale social engineering rather than piecemeal reform, and yet this idea (that 1st emerged in the 60s) has been largely dismissed by academics who realise that development is complicated process involving subtle interplays of markets, and systems that operate in a way that is not always immediately reducible by government planners. In other words – we do not always know what we are doing, so we need to tread cautiously and measure the results of our work rather than try to smash poverty with a giant fist of whose effectiveness we are unsure.

 After the fall of communism it was thought that such “shock therapy” would be beneficial. The reasoning was that piecemeal reform of e.g. privatisation would be useless without complimentary reforms of, say, private property. In other words for the sake of effectiveness we cannot wait to measure the success of certain reforms without implementing others at the same time. Sachs says that such a large scale response was critical in addressing high inflation in Poland and Bolivia, yet such solutions do not fit all countries with such varied politics, institutions and incomes. In fact such reform in post-communist states was a disappointment as it was not possible to implement all the reforms at the same time. Such “structural adjustment” is not feasible. In the rich countries of the world progress was slow and considered, not rushed, and thus the authors propose a gradual approach for developing countries.

 The Theory of Aid and the Poverty Trap

  • Poverty traps caused by lack of savings, demographics and insufficient capital stock can be broken by aid argues Sachs. Aid thus has positive effects on growth in developing countries.
  • Easterly contests this: aid in Africa has been high, but it has the lowest growth. Aid has been rising whilst growth rate has actually fallen. Despite long term aid since the 50s, these countries still find themselves in poverty traps, so the healing effects of aid should not be overstated. 
  • Sachs claims that corruption etc. are overplayed as reasons for poverty. Easterly argues in fact bad institutions and policies are the cause of poverty. Empirical research shows (he claims) that bad government is the causal driver of poverty even when we control for initial poverty.
  • Sachs wants to say that the poor countries are ready to take care of themselves, and that increased aid will in fact inspire governmental reform. Yet the evidence suggests that low income is strongly correlated with corruption. Whilst causality of corruption with respect is still debated it seems foolish to dismiss the evidence.

 Poverty as a Technical Problem

  • Easterly argues that Sachs sees poverty as a technical problem that can be fixed with recognised methods. I.e. poverty is solvable with technology and planning.
  • This ignores the social causes of poverty – bad institutions, policies, trading networks that exclude the poor. Sachs want to intervene without any thought for how public and private goods are to be generated by natural incentive.
  • The view of poverty as a technicality lead to Sachs’ administrative solution (the UN administration point).

 Three major problems with this approach

  1. Plans can be decreed at the top but they must be implemented at the bottom. The bottom is unobservable by the top, and the how do you solve the principal-agent problem to incentive the agents to use all the aid etc. for the purpose of poverty reduction. E.g. Uganda where 30-70% government provided drugs disappear before reaching the patients.
  2. Administrators at the top do not have enough information about the situation on the ground to design the right interventions.
  3. Multiple goals/actors weaken the incentives for agents to deliver. Multiple goals means it is hard to get one agent to focus on attaining her goals without worrying about all the others at the same time, so she becomes demoralised and confused. This could be avoided with a very strong principal (in effect what Sachs actually proposes), but we still meet problems 1 and 2.

 The Alternative

  • Piecemeal approach
  • Aid concentrates on finding interventions that work and focussing on them. E.g. vaccination programme that virtually wiped out measles in Southern Africa. E.g. reducing class size. E.g. education subsidies. E.g. clean water. 
  • “The piecemeal engineer knows, like Socrates, how little he knows. He knows only that we can learn from our mistakes… He will avoid undertaking reforms of a complexity and scope which makes it impossible for him to disentangle causes and effects and to know what he is really doing.” K Popper. 
  • “Small moves cumulate into bigger benefits.

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