Russ Roberts

Easterly on Growth, Poverty, and Aid

EconTalk Episode with William Easterly
Hosted by Russ Roberts
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William Easterly of NYU talks about why some nations escape poverty while others do not, why aid almost always fails to create growth, and what can realistically be done to help the poorest people in the world.

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0:36Intro. West has spent a mere $2.3 trillion in hopes of ending worldwide poverty. Very little of it actually reached the poor. Nearly $600 billion of aid went into Africa, but economic growth per person has been 0 over that period. No change in standard of living. Where did it go? Unique thing about aid: no way for intended beneficiaries to give any feedback on whether the money is reaching them or not. Opposite of consumer markets where if someone doesn't buy a product, seller takes notice. Aid agencies made surprisingly little effort to find out if the money was reaching the poor. Aid industry has been operating in the dark. H. L. Mencken "Conscience is the feeling that someone might be watching." Surprising that the agencies didn't do more to monitor how well their aid was doing. No matter how noble the purpose, the main motivation that drives a bureaucracy is to perpetuate its own existence. Negative results is bad publicity for future fundraising. Easterly was at World Bank in research department, but main incentives were to keep the money flowing. Spend your budget was number 1 rule, else what is rationale for getting the budget next period?
6:34Truth is important, romance is dangerous when it involves people's lives. Elusive Quest for Growth, economic fads for development. At one time, investment was thought to be the key. Didn't work; why not? Incentives matter. Naive idea was to just give money to countries not investing enough and they would invest it. But there was no incentive to invest. If people expect their profits to be confiscated by government, they will not invest. Money goes into consumption or political consumption. Another idea: education, a form of capital, were also thought to be the key. But building schools and hiring teachers doesn't fuel the incentive to take advantage of them, or to supervise the schools; huge quality problem, government-owned sector so if government dysfunctional, schools will be as well. Unqualified teachers, teachers working just for political patronage. Pakistan survey: landowner turned school buildings into cattle sheds. Rick Hanushek podcast. White Man's Burden: if we just raise enough money it will work. Why do those plans fail? Lack of feedback, lack of knowledge at the top. Fail for same reason that central planning in the Soviet Union failed: people at the top cannot possibly have enough information to meet all the needs at the bottom, plus no feedback mechanism. Planners v. searchers. Planners operate at top and have grand plans, often win the argument--whoever promises the most wins even if promises are unlikely to be kept. Searchers, field workers, are less likely to get celebrity status, out there in the fields, experiment by trial and error, asking what does work? Analogous to the entrepreneur in the free market. How to get malaria bed-nets to malaria victims as opposed to just a malaria program.
16:09Another failed theme: role of markets. If it's not investment or education, we just need markets. Why did it fail? In hands of bureaucrats, markets are simply imposed via central plan on another society that is not used to free markets and doesn't have the norms, values, and structure necessary for free markets to operate. Shock therapy in the Soviet Union: free prices, private property and presto you have a free market, but the Soviet Union had gone 70 years without these, operators stealing other people's money, ended up with one of the worst recessions in economic history. Hotel rooms contract example. Cultural shortcoming. Economists not good with cultural norms. Can't just implement a western court system. Ironically, many of these problems apply to the United States when we sometimes try to impose a market by the top down as opposed to its emerging, e.g., California and energy, school systems have some of these kinds of problems.
21:23Traps, poverty as a trap that you get stuck in. Easterly: it's a myth. Vicious and virtuous circles. What do the data say? No evidence of poverty trap. Poorest group of countries have pretty much the same growth rate as the richest countries. Why does it appear that there's a poverty trap? People design tests in flawed ways. Fallacy: If you look at the end of the period who is poor then they had the worst growth by definition. Fallacy of composition: different countries enter and exit the poorest 20%. Paul Collier podcast, talks about traps, e.g., civil war can create a circle. Do you think that's correct? Easterly: No. (Dutch disease, country with a resource doesn't thrive though it manages the resources well.) Bottom Billion falls into that fallacy: looks at the end of a certain period, finds the poorest countries; there are always some that have at that endpoint have had bad things happen and they will be the poorest. Go to Las Vegas, at the end of weekend ask and find the poorest; by definition that person had the worst luck even though everyone faced the same odds beforehand. No bad-luck trap. Argument is that in the next 25 years there is no additional likelihood that the countries who are poorest now will still be poorest at the end of next 25 years. Julian Simon bet in order. Stronger than correlation vs. causation: correlation itself was biased to imply a poverty trap when there was none. Correct way: ask who is poorest at the beginning of the period, who has the worst civil war at the beginning of the period.
30:37Can aid make a difference? How can reasonable people such as Easterly and Collier come to such disparate conclusions? Is it due to way of reading the data vs. philosophical differences? Philosophical differences matter, top-down expert concept that great leaders are at the center of history, philosophical approach to social change, 18th century enlightenment's view, French Revolution was kind of a top-down attempt to remake a society, as opposed to Burke's view that experts have to be humble and modest, can't just remake it. Social engineering idea vs. evolutionary, gradual. Jeffrey Sachs, Angelina Jolie. Romance of utopia, Russian Revolution: everyone understands that it was a human, economic, and social disaster--witness the Gulag--but people still look to that kind of approach with hope. Maybe aid just hasn't yet been tried hard enough, effectively enough. Bruce Bueno de Mesquita podcast. Same argument as maybe Communism has never been tried, maybe Christianity has never been tried. Certainly aid has been given for bad reasons, but there is no convincing evidence that aid given for good reasons has done any better. Utopian expectation for aid will never be realized, but aid could do a lot of good things for poor people. There are some successes, small pox wiped out, vaccination programs, infant mortality reduced in Africa.
39:00Bureaucracies, anti-globalization. To an economist globalization is trade, sometimes immigration. But anti-globalization charge is to look at institutions like IMF and World Bank and charge that they have, by imposing free markets, mired the poor countries to which they have directed funds into poverty. Can't force free markets on society, or you set yourself up for a backlash, Bolivia, Ecuador, Nicaragua in which anything that goes wrong can be blamed on free markets and the aid agencies. Cannot force other people to be free. A nation is not an actor, though. Political process is often hijacked by thugs, democratic backlash may not really be democratic; but there does seem to be an actual democratic backlash. Bryan Caplan's podcast: rich countries also have anti-market bias. IMF often set conditions for loans, but even if conditions weren't met, the loans kept coming. Conditionality is not a credible threat, we allowed countries to use the existence of thugs as an excuse. Some countries turned out to be a little bit improved, though. On average most countries have been moving away from extremely populist interventionist programs, in favor of more reasonable market-determination such as for exchange rates and interest rates. Worldwide trend, not necessarily due to IMF or World Bank. India article: did IMF play a role in that development leap? No.
48:28But some countries, like China and Easterly argues India, grew and grew dramatically without much intervention from the West? What techniques can be imitated? Common elements of success stories: homegrown, not necessarily democratically accountable, e.g., China, but people who have their political careers at stake and home grown. Moving away from central planning, more market mechanisms, more international trade used to fuel the successes of China and India. Not a recipe, can't write a 10-point program to guarantee it. Infant-mortality, life-expectancy, education have risen dramatically in Africa. Quote from White Man's Burden: When you are in a hole. Aim should be to make individuals better off, direct aid to individuals, not governments. Aid can achieve much more than it is achieving now. How can aid and aid agencies be restructured to make a difference? Evaluations. GlobalGiving.com, eliminate the IMF and World Bank and offer option for individuals to give. E-bay meets foreign aid. Projects that look good attract funders. There is a lot of need and a lot of good will in the world, need an efficient matchmaker. GlobalGiving was started by World Bank staffers, small projects, a few thousand dollars, what assurance to donors that projects are real? Reputational mechanisms common to free markets. Run some preliminary checks, reputation climbs or falls. Searching vs. planning: searchers can try anything, excites enthusiastic young folks, entrepreneurs: irrigation pumps, Kickstart, powered by human labor. Discoveries waiting to be made.

COMMENTS (18 to date)
Floccina writes:

Great pod cast. As far I can see his analysis is consistant with the data. I particuly like that he says that we should give to people not governments.

Kristian writes:

Thanks.

Would Bjørn Lomborg and his Copenhagen Consensus be a suitable follow-up to this podcast?

I would also advice looking at the latest African GDP growths figures. Change taking place.

Michael writes:

Russ and company, another great podcast. It's good to see you taking on more "untouchable" subjects and debunking them. I noticed that several of Easterly's observations would also apply to charities--another sacrosanct industry which, upon scrutiny, turns out to be as ineffective and self-serving as many of the aid programs you discussed. I'd love to hear a podcast on that subject. Thanks so much.

Ramiro writes:

Great podcast. I currently live and work and Latin America and have I have never been a fan of "shock therapy". We can't expect people to change their habits and patterns through force full interventions in exchange rates, etc. Such theories are analogous to fascism, and we know where that leads.

I recall during the early 1990s there was a lot of support for these types of policies, needless to say, many those that were successful were eventually over shadowed by those that failed. Furthermore, a great deal of corruption diminished the role of what were strong institutions.

I am firm believer that the market works. Volunteering in shanty towns for an NGO that builds houses, one can clearly see where the government programs work and fail. In the case of Argentina, there are thousands of people who live in these precarious dwellings, but yet have access to internet, satellite tv, running water, air conditioning, and other luxuries. Over the years, the devastating effects of inflation have practically destroyed the mortgage lending industry, effecting a large deficit in housing. When you talk to this people, they are honest tax payers, but no bank will loan them the cash for house! And if they do, the loans won't go past 3-5 years, making it impossible for them to afford a house. The government recently has set up a federal housing program which seeks to "move" these people from their precarious conditions into more "habitable" spaces; the results have been disastrous, neighbors become separated and are placed amongst strangers, creating "ghettos" of crime-infested thugs.

Easterly's comments are right on, the economy is not made from bureaucratic decisions from technocrats but by individuals who are bound to a set of choices into their utility curve. It is lamentable that highly trained people in the Washington Institutions failed to understand this. Maybe it is a question on our profession. Maybe, as Russ said in a previous podcast, we need to be weary of studies who rely too much regressions that imply cause.

Brian-NJ writes:

Once again I cry the accolades for Roberts, on the continued assemblage of the most necessary issues for analysis in todays culture.

There are a few related topics I will bring to attention including Easterly's appearance on Intelligence Squared, which is a great program. Find it here,
http://www.npr.org/templates/story/story.php?storyId=17095866

I also wonder how viable Muhammed Yunus solution is, see the Nobel Peace Prize winner explain his solution to poverty with claimed results on Charlie Rose here,
http://www.npr.org/templates/story/story.php?storyId=17095866

As for me, well as some of you may know, I'm not the most well informed individual but I have the common sense solutions which I can't understand are not being implemented. I think we have all experienced the results of throwing money at a situation to make it go away doesn't work. So why not get these foreign aid agencies to concentrate on one country, choosing through perhaps a lottery system, get it up and running and the new thriving community can help assist the next nation. If there were 50 people lying on the floor suffering from food poisoning or some similar issue and I had the means to assist, I wouldn't throw medicine and medical apparatus liberally all over the 50 individuals, I would start with one, then after that one was well, continue to the next and urge the revitalized individual to help in the assistance. Before long there would be more assistance than in need, however I will observe that the first one helped is not obligated to stick through the whole process but if each aided victim did it would speed the process up, if not they would all be helped in due time regardless.

Is it politics that prevents this focus factor? Then we need someone with balls to just do it. Aid one nation, by lottery, and get them healthy, that would be more success than 50 failed nations and 600 billion wasted.

James writes:

Thank you very much for another great podcast.

One small point: I believe the reference in the podcast to "Dutch Disease" was a little unclear. The term is typically used to refer to the impact that supply-induced expansion of one traded good sector (typically, although not exclusively, natural resource extraction) has on other domestic traded goods sectors (typically, although not exclusively, manufacturing). Since the level of a nation's total exports is largely determined by the need to finance a given level of imports, expansion of supply of one type of export commodity (eg natural resources) requires exports of other commodities (eg manufacturing) to contract. The mechanism that achieves this is appreciation of the real exchange rate. The country as a whole is better off (via income from the new resource, and a likely improvement in the terms of trade) but owners of fixed factors in the contracting traded goods industries may be worse off.

Phil Segal writes:

Great program. Makes one think whether foreign aid or giving to ngo's ever makes sense. However, what about emergency aid given after a sudden unexpected event such as an earthquake, tsunami, etc? If the US shows up at an earthquake site with blankets, tents, water, food, and medicine, and directly ditributes it to the victims,the short term effect is to keep people alive until they can work/build their way out of the disaster.

Also, is there any data on the effectiveness of programs such as Peace Corps, VISTA, Teach for America, Doctors Without Borders, Engineers for a Sustainable World, or similar programs that deliver one on one or direct services in third world locations?

Robert writes:

With respect to AID, I believe it does not help. Well that is it doesnt help the country you are giving it to, but it does help the country who gives it. In my experience with aid, the US grants AID to countries for economic development and infrastructure projects with the stipulation that US based companies bid and are awared the project contracts. So in reality a majority of the aid money comes back to the USA and with the money multiplier effect, stimulates our economy. It may help that country in the short run by creating local jobs to fulfill the contract - workers to build bridges, lay pipe systems, etc but I'd imagine long term results are sketchy.

Great podcast!

Russ Roberts writes:

Robert,

The money multiplier effect you mention is going to be canceled out by the lost stimulus caused by the people who pay for the aid (taxpayers) who now have less money to spend on other things. It will increase the profits and employment of certain parts of the economy--the bridge builders, pipe layers and so on. It will hurt the profits and employment of the industries the taxpayers would have spent their money on but no longer can because they have to fund the aid. So politically, it helps an identifiable group while hurting an unidentified group. Politicians often find such results beneficial. But they do not benefit the nation as a whole.

rxb..... writes:

One of the things that the World Bank is focusing heavily on is building institutions including things like transparency, disclosure, best practices and the like. One suspects that World Bank's voice would not be heard if it did not come with the loans. While micro-loans or direct loans are effective, it is entirely possible that the governments in these countries would appropriate the gains via taxes or worse. thoughts?

enronal writes:

Easterly is more credible in part, I think, because he so scrupulously avoids overstatement and there's no defensiveness in his tone whatever. Just a note of sad resignation.

That having been said, (at the risk of contradicting myself) in implying that differences in growth rates are due to random chance he is surely saying more than he intends. Is it a coincidence that so many African thugocracies exhibit low or negative growth? Is it by chance that South Korea's GDP is way higher than North Korea's, that Argentina, which was richer per capital than the U.S. in 1900, is now much poorer, that Hong Kong is richer per capita than the rest of China, etc.?

I don't think he meant to say that but one could draw that conclusion from his remarks.

Fraser writes:

Usual excellent podcast. I found the sections dealing with utopian thinking to be especially interesting having just finished a book by John Gray - “Black Mass: Apocalyptic Religion and the Death of Utopia” – which traces utopian projects (and their horrible failures) across history.

Russ – if you could get this guy on it would make an excellent interview!!! He is Professor of European Thought at the London School of Economics...

Kristian writes:

Re GDP

"Growth in sub-Saharan Africa (SSA) is expected to hit 6.7 percent in 2008, up from 6 percent this year.

Average inflation, despite higher commodity prices, is expected to be about 7½ percent in 2007, about the same as in 2006, but should decline to 6.7 percent next year."

http://www.imf.org/external/pubs/ft/survey/so/2007/CAR1020A.htm

Simon Clark writes:

Best podcast in a while in my opinion :)

Michael Brown writes:

This was a really great podcast so many thanks to the authors. The part about Colliers theory of poverty traps was quite interesting as it seemed fairly central to the differences between the two. Is there a discussion about this point on the web somewhere? Or some numbers on the propensity of countries to jump in and out of the bottom billion.

It occurred to me that in the Las Vegas example you would likely end up with a continuum between losers and winners at the end of the two weeks. If there was some structural reason that you would keep losing or winning then you would have gaps between the losers, the ones that came out even and the winners. But if apply this to the GDP data per capita by country I see a pretty smooth distribution in the lower income countries which would seem to support Easterly's point.

http://www.photius.com/rankings/economy/gdp_per_capita_2007_0.html

http://www.flickr.com/photos/wfryer/148281788/sizes/o/

Any pointers?..

I've never read a book on aid before but I may try this one. The GlobalGiving website is also excellent and I will certainly give it a try.

Norak writes:

Easterley says that he believes in freedom and thinks that countries should decide themselves whether they want freedom. Russ did say that if the democratic system is flawed (e.g. if it is hijacked by elites or thugs) then this may not be effective. However, it is more than that. As Sowell says in a later podcast, there is no such thing as "society." Arrows Impossibility Theorem proves that there cannot be a social preference that doesn't fulfill very basic ideals.

Even if we have a simple system whereby an idea with majority support is approved, 60% of citizens may not support freedom but 40% still do, and if Communism were imposed upon everyone then those 40% who didn't want Communism would still get Communism. Therefore, Easterly cannot use democracy to talk about what countries want because countries don't want anything. We are all individuals and the idea of social preferences is an aggregation of individual preferences, and the method of aggregation may be seriously flawed.

Easterly is also against the idea of forcing freedom upon people because, he claims, that is contradictory. However, I believe it is best. The reason why is because forcing freedom upon people Pareto dominates forcing non-freedom on people. Suppose 50% of people want freedom while 50% want to be slaves. If slavery is imposed, then everyone who wants slavery gets what they want but those who want freedom don't. However, if freedom is imposed, those who want freedom get what they want but those who want to be slaved have the freedom to reject freedom and privately arrange among themselves to be slaves. Thus nobody is worse off.

Norak writes:

I think I would like to bring people's attention to the site kiva.org which Bill Clinton himself endorsed. It's microcredit E-bay style.

Matt Povey writes:

Ed Burns (co-creator of The Wire) makes a similar point to Mr Easterly's regarding charities' propensity to become fiefdoms.

http://reason.com/news/show/125309.html

"From what Geoff surmises, it’s more about turf. If I come into your turf and let’s say you’re running a rehab center, or you’re running a day care program or whatever, that’s your little fiefdom, you know what I mean? That’s your little piece of the pie. You’re not going to give that up easily. You’re going to fight anything that tries to change that."

In this instance it is as regards the possibility of new approaches to helping deprived kids avoid getting into crime\drugs etc.

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