“The Elusive Quest for Growth –
Economists’ Adventures and Misadventures in the Tropics”
by W. Easterly
ISBN: 0262550423

Review by: Pamela Ravasio, Editor

“People respond to incentives [, all the rest is commentary.]” - taken from the book “The Armchair Economist”, this quote is the official motto of this insightful primer about 40 years of (failed) development aid efforts.

Simply put, an economy prospers if the incentives are “right”, meaning: it results in both, personal financial and non-financial benefits, for the majority of the participating individuals. The right incentives lead to individuals and groups investing into their, and therefore the country’s, future.

What does this mean concretely? For instance, education is an investment into the future of an individual, its family, its social group. However, education is only of interest, if the individual receiving the education will obtain some clear benefits in return to his or her investment (time, money) made in order to obtain the education. Access to skilled work and hence to an appropriately higher salary is one type of benefit, social recognition is yet another type of attractive pay off.

If a majority of individuals does not believe in being able to obtain any benefit from their efforts and investments, the economy will stagnate or decline. In our example this means that, if an individual is bound to either not find employment despite educational efforts, or alternatively only unskilled or underpaid employment, education is not an attractive prospect.

In short, the lack of expected future benefit (pay off) will influence individuals’ choice of whether or not gain eduction.

Education is but one example of how the concept “people respond to incentives” works. Industrial investments, family planning, voting in elections and many, many other examples are mentioned and explained in detail throughout the book.

In the first part of the book, with “people respond to incentives” at heart, the author analyses all major panaceas, or vogues, of public aid programs of the past decades, which effectively lead to debt overload of developing nations in some cases, to even more corruption in others, and to less competitive economies over all: Aid for industrial investment, aid to improve education, aid to foster population control, aid as a means to pressure governments into policy reforms, and finally relieving debt while giving out more aid. For each of these panaceas the statistics suggest that, while well intended, the efforts were at the bottom line not entirely thought trough, and have overall done more ill than good for those who were the focus of attention: the individuals that just wait for the one opportunity to get a go at climbing out of their poverty pit.

With the first part dedicated to the flaws of policies and attempts past, the second half addresses those factors that remain a central challenge to get the incentives right for (potentially) successful aid giving: social phenomena such as poverty traps and polarisation between factions (incl. wars), as well as governments that kill economies through bad policies and /or corruption. And a ray of hope comes hand-in-hand with a warning: top edge technologies, with high-capacity broadband data network at their core, contain a tremendous potential and a risk. On the one hand, they could be the final tomb stone to poor economies. On the other hand, they may well be the device to leapfrog out of a vicious circle thanks to comparatively (to non-high-tech) lower infrastructure cost combined with a wider versatility for profitable use.

The chapters on corruption and conflicts are particularly insightful and relevant. First of all, the two aspects are to some degree interlinked. Second, they make clear that corruption is by no ways only a phenomenon of developing economies, but that also in developed economies ways and measures were found of infiltrating public and private mechanism with corruption to one degree or another.

Finally, it becomes apparent that a shy look into today’s newspapers suggests that in reality, industrialised countries (read: also the UK) face many of the same type of challenges in their internal policies as developing nations do. It is a fact that public debt is currently high throughout the developed world (UK: interest paid on public debt is higher than investments on either education or the armed forces). Further, the quality of public service is ailing, and rapidly decreasing. Examples? Postal and transport network strikes despite competitive salaries paid, ailing infrastructure and quality in the healthcare systems despite the system’s overall crippling costs.

Research agrees that high public debt combined with low quality public service is directly linked with high incident rate of corruption on the one hand and low / decreasing economic growth and hence a flagging economy on the other (and as a consequence, lower incomes, more unemployed, …). Maybe, the developed and the developing world are not so far apart after all – and will be much closer still in the future.

This book is an excellent introduction to the macro-economics behind development and global aid giving. But beyond this, it also offers insights into a much broader range of mechanisms that are directly applicable to the problems and challenges encountered in developed economies, too, specifically in the aftermaths of the recent economic downturn. Sadly, the implications of the explanations suggest that, in reality, the current downturn – and possibly slight recovery – are but the introduction to a potentially much harsher future, unless not only the developing world, but certainly also the traditional donor countries review their status-quo substantially.