EDUCATED FOR WHAT
There is a generally wide acceptance that education is the key solution improve the poor countries economic conditions. Using the simple causality between things, education can improve the human capital of the country that could eventually lead to a more productive country. Education teaches people skills that are essential if a country is achieving for growth. However, Easterly does not see the relationship of education to growth as to be simple. In this chapter he divided the discussion with his three main arguments that education explosion has nothing or little to do with growth, that skilled workers in poor countries still receive lower income relative to those who are in rich countries, and that education is worthless without incentives foreseen in the future.
Easterly strongly base his findings and opinions on a collection of wide range of studies. His first argument that the boom of education during the 1960s to 1990s has little or nothing significant to do with growth is based on several empirical studies. If the simple hypothesis that education is a panacea for growth holds, then the high enrollment of children should result in higher gross domestic product (GDP) of the country. Sadly speaking, statistics show that even if the average growth of enrollment rose up to more than double-digit percentage, the GDPs of these poor countries remain low (main example are African countries). But the discussion is not entirely about demonizing the image education can bring to the poor countries. Aside from human development, education can rise up human productivity. This makes sense and puts a light that there might be still a positive relationship between education and growth. However, Easterly believed that the rise in productivity will be vain in the long-run unless accompanied with other factors that impliedly pointed out in the next part of the chapter to be important. Another scholarly opinion that the author entertained is the reverse relationship of growth with education. Since humans are strongly driven by incentives, a positive forecast of the future growth will motivate the people to study now because, practically speaking, humans will not do things that will bring them nothing.
Education and income are two intertwined concepts because income is a great incentive for humans to educate themselves so as to be able to get a work. Mankiw did a strongly theoretically-based study about education and income with which his assumptions failed to capture the whole picture of the story. Easterly argued that the use of secondary education as the level in which growth will be much affected is an exaggerated one because primary education is much widespread and, adherent with early observations, has less effect on the variation in income. Secondary education, which is less widespread, is not a good tool to picture the effects of education with income. Another assumption that was seen to be farfetched is that capital flows would equalize rates of return to physical capital. With this, human capital (skilled worker) is only the one with differing rates of returns across countries and that the few skilled workers in poor countries will have the highest income. This is evidently wrong as we can observe movements of skilled workers to rich countries. The movement of skilled workers aggravates the hardships of poor countries in their quest for growth.
Last strong argument is that humans will not work unless they are motivated. Governments of poor countries should provide an educational system wherein the teachers will be motivated to teach quality education, the students will have ample school materials and the students will have the drive to improve themselves and eventually help out their country in the future. If these governments will fail and continue with their politically-motivated governance, then their citizens will just invest in political and even illegal activities.
CASH FOR CONDOMS
If it is not the education, then what other things should the economists be concerned about to stay put the poor countries in right path towards growth With the slow expansion of human and physical capital, some scholars say poor countries should economize their resources through population control. Some says that aside from the benefits of having a smaller size to govern, controlled population growth will secure better living conditions wider space to live, water, quality environment, and food security. Aside from improved quality of life is that jobs will be more sufficient when population controlled because population growth is rapid that it exceeds the job creation rate. The solution that they proposed is Cash for Condoms.
The reports and suggestions of international organizations like United Nations (UN) have failed to realize the whole story. Due to the report of Cairo Resolutions in 1999, UN started giving away condoms to poor countries. This is due to its conclusion that there is a demand for smaller families and that access to safe and accessible contraception has improved but there are still many couples with no or little knowledge and funds for contraception. The campaign may seem to provide incentive for people to use condoms because aside from it is cheap, it raised the consciousness of the couples on the long-term costs and hardships of having many children.
Some studies concluded that for the past century food production has actually increased and their prices have become cheaper. At this point, advocates of population control are wrong in their claim that population growth will be the cause of food shortage and famine in the world and that there might be some other factors that strongly cause the food problem. Another morale of the story Easterly wanted to convey is that high population growth rates are actually choice of couples and that the allegedly unmet demand for contraception must be out of the concern and focus of international organizations. Women who have high number of desired births actually have high actual number of births and that this desire is a freedom nobody can take away.
Since some economists and scholars point at rapid population increase as the culprit of impeded economic growth, Easterly demanded for studies that will prove such claims. During the nineteenth century, it can be observed that when population growth is slow, the per capita growth is also slow. This is the observation that the author is pointing not to be ignored about. Examples of Third World having slower population growth accompanied with slower per capita growth means that it is a hasty conclusion for Thomas Malthus, Lester Brown and other population control advocates to say that too high population increase will lead to a disastrous nation with little or no room for economic growth.
On the brighter side of the story, more people mean more possibilities of having a genius that could eventually help the growth of economy. Aside from that, humans will have the incentive to strive hard as the elder generation does not want the succeeding generations to suffer from the hardships population size might bring. And when humans strive hard, they formulate new ideas wherein the food production will be sufficient, there will be technological advancements and eventually potential for growth. On the simplest explanation, larger population size can bring higher taxes which, in return, are used in growth and development of poor countries. Speaking of development, the idea should be quality over quantity and that the poor countries need to focus on developing the life of each of its citizens, not necessarily decreasing the number of its citizens. We should not be afraid of the number rather we should see it as a challenge and an opportunity to grow. Cash for condoms investment failed to provide incentives for couples to reduce number of children so we should rather refocus and turn into investing in people to achieve growth.
THE LOANS THAT WERE, THE GROWTH THAT WASNT
Loans are granted by donors such as World Bank and International Monetary Fund to needy countries not only to make profit for themselves but with hopes of helping them in their development. Since the 1960s, many loans were doled out accompanied with necessary conditions in order to really achieve growth. However, statistics show that not all poor countries grew even with the continuous support from the World Bank. The chapter suggests that adjustment loans miss to incorporate some important points
One reason why poor countries avail these adjustment loans is large budget deficit. Having this problem poses disincentives for growth because of uncertainties on public expenditure and non-conduciveness for private investment. Ironically speaking, the adjustment loans should have helped poor countries reduce budget deficit but some are stuck with this problem. Easterly admitted that World Bank commits mistakes by not considering the negative real interest rates of recipient countries. This is a crucial point the Bank missed because why would the donor want to give donation to a country that has a financial and banking crisis The goals targeted by loans will just be in vain because without an effective financial and banking system, inflation will continue to soar. Money will have little value and thus no incentive to save in banks due to decreasing returns on bank deposits and no incentive to invest due to fears of non-profitability and non-liquidity. Everyone agrees that with injection of large loans, inflation is inevitable, thus, giving loans to a financially-turmoil countries will just aggravate the problem. But the unresponsiveness of the Bank with these issues resulted to continuous granting of loans to countries with severely negative real interest rates. Evaluation of the current situation of a country is important and fast responsiveness of donors should be present so as to really rescue poor countries, as Easterly has also impliedly suggested.
It is unclear why the donors opt to give adjustment loans to corrupt countries because corruption makes everything about the country go bad. Unjust justice system, political turmoil and rent-seeking economic activities are given priorities and not policies that will improve the economy of a country. Accusations tell that donations are due more on political and self-interest of donors not on the necessary policy changes to pursue growth. But whatever the primary reasons of the awarding of loans, the recipient should focus on how to make the most out of the aid. However, there is a looming pattern that those countries given opportunity to grow return to what they traditionally do. Institutional and policy changes will likely to occur at the beginning then eventually poor countries become irresponsible and unnoticing that they are returning to the bad practices they usually do. In economics, changes occur not drastically but on the long-run so consistency on the set of policies should be observed.
Although adjustment loans can cover-up for the deficits, they speak of debts and possibly larger future budget deficits. Minimizing deficits today will automatically mean larger deficit in the future because of foregone earnings. In this case, the recipient should really dedicate itself in growing the economy by using the aid wisely through weighing the benefits and costs of either selling a state-owned business today, investing in massive resource extraction or lowering present interest rates. But the side stories are, the governments of poor countries devise creative ways just to acquire a grant and eventually drowning themselves with future deficits and debts.
Easterly criticized the debt forgiveness policies and he suggested that adjustment loans should be only given to countries which have shown changes and consistencies. The policies should be made first before presented to the donors for rigorous review and approval. This is to assure no wasted resources and to discipline the aid recipients to be more responsible and consistent with their actions.
FORGIVE US OUR DEBTS
Having discussed the loans poor countries enjoy, it is now critical asking the question on how they will pay the principal plus the interests of their debts. We know that debt can double its figure when compounded in time and not paid in time. Since it has been discussed that the adjustment loans can not automatically bring help in economic growth, it is now put into concern whether the countries granted with loans but with little or no economic improvement can actually pay their foreign liabilities.
The source of payments for debts is the national budget and huge part of it goes to the debt servicing. It is important for the poor countries to pay even a little portion of their debts so as to avail future loans. Before the entrance of new millennium, there is a worldwide call from the public to allow debt forgiveness because instead of allocating the poor countries national budget for public use, much goes to the debt servicing. The advocates of debt forgiveness have these sentiments that debt to World Bank and IMF impoverish the poor countries that these countries can not move on and rise up from poverty because of debts. In the sense, they were right that large portion of budgets is dedicated to debt servicing and that less is left for public use, however, the effect of adjustment loans should not be that way. If only the governments are efficient and responsible enough with their policies, the poor countries will not be highly-indebted and instead will have opportunity to grow and develop.
The campaign failed to realize that debt forgiveness is already in practice decades before the new millennium. In fact the World Bank and rich countries have drafted series of agreements about raising the amount of debt to be forgiven and have made new policies wherein debts will not be a very large burden to Highly Indebted Poor Countries (HIPC).
Given the favorable provisions of debt reliefs, poor countries may be dependent on the fruits of this favor and continue to be irresponsible. Expounding the peoples response to incentives, there is a high positive relationship between debt reliefs and new borrowings. If a country knows that some of his debts will be forgiven in the future, with interest rates charitably set lower than the prevailing market price, then there is an incentive to borrow much today. This is supported by evidence from World Bank with new borrowings higher than the cancelled debts of forty-one HIPCs. This is one argument against overly charitable debt reliefs because poor countries become not so serious about developing their country in expense of the foregone earnings the donors must have collected. If this continues, then no development could be achieved debt reliefs will not solve anything aside from erasing previous debts.
Acquiring debts today means mortgaging the future, as Easterly always insist. The debt to export ratio is a good proxy measure on how well poor countries may be when they have been granted debt reliefs. People should not be blinded by the immediate drop in this ratio after the relief because the main highlight is not seen on figures. During the continuous debt reliefs for forty-one HIPCs from 1989 to 1997, the debt to export ratio is decreasing gradually and then dramatically (due to improvements of relief conditions). But this did not improve the conditions of HIPCs, in fact, per capita income of HIPCs between 1979 and 1998 declined strong evidence that debt reliefs will not help poor countries grow and develop.
All the blame should not be vested only to the irresponsible borrowers but also to the irresponsible lenders. If the rich countries and World Bank would want to teach poor countries on how to run their countries, debt relief should not be the solution. But if a poor country shows consistent economic improvements over the years, then they must be the ones eligible for debt reliefs.
TALES OF INCREASING RETURNS LEAKS, MATCHES AND TRAPS
So far Easterly concluded that education, population control, adjustment loans and, debt reliefs can not be perfect panaceas for economic growth but the quest for finding solutions to the growth problem did not stop. It has been argued that human capital is not enough unless it is accompanied with technological or physical capital acquisition. Given fixed labor, returns on technological investments will be not diminishing as long as a country finds knowledge of new technologies that economizes their number of labor. Thus technological improvements can hypothetically potentially help an economy grow.
The largest economies in the world are highly industrialized each with high level of productivity and returns to the assets. With computers, information can be leaked fast and ideas are spread in split seconds. The poor countries can have a wide range of sources to learn the technology of rich countries. Knowledge teaches new techniques and skills used in creating things or devising ways that can directly prop up production output. If a poor country wanted to grow, then it must also consider the importance of having knowledge practical knowledge that could make machineries which are toys in developing the skills of workers. In turn, expansion of knowledgetechnology as well as human capital could possibly induce growth.
Ideas can be passed on and learned by other people thus ideas can not be fully owned by a single person. Creative business ideas are leaked and applied by other businesses (competitor or not) when deemed appropriate and profitable. The story will be back to one of the main concern of economics the increasing returns which can be achieved if there is knowledge on how to produce things at the lowest possible cost. Continuous leak of knowledge is beneficial as ideas can be used and reinvented through time. Easterly points out the difference between the natures of machineries with knowledge diminishing returns does not apply in knowledge investment. Another nature of knowledge is that the more ideas are made, the more they would be beneficial because new ideas are improved versions of the old ones. Through the pursuit of improving the existing knowledge, more efficient, effective and useful machineries can be invented and countries wanted this to happen. Non-diminishing and increasing returns to new knowledge will be then followed by incentives to further improve. Overall, knowledge leaks increase returns to the society and not to the private since they will be endangered by competition as their ideas are pirated by other private entities.
Knowledge returns will be based on how much knowledge a country has. Easterly argued that a country with more knowledge will have higher returns than a country with less knowledge. The trap can be pictured in this relationship first, poor countries have existing problems on providing matched skills thus low returns on those skills second, low return on those skills is a disincentive for people to achieve education and learn high-level skills (as also explained in chapter 4) third, people will decide not to invest in acquiring new knowledge which is a threat for growth and development. Thus, a poor country will surely face doubled challenges since it is already having limitations.
Acknowledging the fact that there are still barriers in knowledge utilization and application, it is suggested that government should invest in new knowledge, provide matching skills for high-level skills to encourage learners, and keep policies that will retain incentives for the private sector to invest in new knowledge themselves. With this, poor nations can be unleashed from the trap and get out from the curse of poor being forever poor.
CREATIVE DESTRUCTION THE POWER OF TECHNOLOGY
The past should be left behind in order to move forward but the lessons must be kept as guidance of what we must do in the present and prepare for the future. Poor nations are characterized by low level of technology and if technology is important in growth, then they must have been lacking what is essential to get out of poverty. But it must be put into caution that having technologies do not guarantee growth because technologies, as discussed in the previous chapter, should bring about increasing returns to scale and provide incentives for people to learn skills.
Related to Chapter 8, new knowledge means creativity to turn ideas into something more useful to the present and this chapter is about technology being reinvented, about leaving the past techniques and machineries to more sophisticated ones. For example, we started out with typewriters for manual encoding but today almost all of advanced countries use computers since it allows faster and more accurate results. This scenario is about Joseph Schumpeters idea of creative destruction of technology. Creative in the sense that destruction (i.e. shift from typewriters to computers) leads not to hardships but to more progressive things. Now, given ever progressing technologies, the concern must be how these new technologies give incentives to encourage users of old technologies shift to the new ones. This poses looming problem between the younger and older generations, between the traditional and the new. The problem will be unending because the new today will later be old and there will be new set of new. But somehow this problem can be addressed through government intervention. Some people might be afraid of change so the government must take initiative for the people and businesses use the available new technologies.
But how can technology flow from the rich to poor countries The first channel is through Foreign Direct Investments (FDI) and the other is through importation of new machines. The FDI enables multi-national companies to invest in differing countries and it can be observed that more and more poor countries welcome FDI in the hope for higher national income and more jobs for its citizens. Foreign companies bring along their assets especially machineries into poor countries where they will invest because they know that there are strong possibilities that such technologies are not available. In return, at the very least, poor countries can have idea on the new technologies existent in rich countries and might encourage local businesses shift from their old technologies to the new ones brought by FDIs. The other way is through direct importation of new machines. The local businesses, after learning new technologies, might realize that it would be more efficient for them to change machines but they are constrained with the lack of availability of such machines. So governments help and support for machine importation is needed and by doing so, they promote use of new technologies at the same time.
Thus change must be embraced and path dependency should be abolished if a poor country really wanted growth. Present and future plans should not be greatly affected by past decisions especially when those past decisions did not really bring good for the economy. Poor and war-wrecked countries should forget about their past and move forward to the future. In this way, they free themselves from the grim of past paths they have taken and move towards new society aiming economic recovery and growth.
In conclusion, since information about new technology is widespread and machines can become accessible, innovation can be possible in poor countries as long as proper incentives are present.
UNDER AN EVIL STAR
From here we know the panaceas that failed the how and why they did not become successful in achieving growth. The previous chapter has proposed a possible solution but all of these come with the phrase ceteris paribus meaning when there is no disaster. Disasters such as calamities and plagues endanger the economy as a whole because it affects people which are one of the primary key for economic growth. Without the hands of laborers, machines can not be made and operable.
Studies show that poor countries are more sensitive with the disasters and calamities. Poor countries have poor infrastructures and poor disaster management. If a disaster strikes, it can kill thousands of people and destroy houses at a time. Of course the government can not leave its people like that so it is expected that they should shell-out funds to help their affected citizens. In short, disasters bring unexpected expenses and may result to deficit that is why poor countries appeal for international donations when they become disaster-wrecked.
It is an appealing idea that everything must be under control but one should not forget the concept of luck. Disasters are inevitable and the governments should know how to deal with them in times when needed. The more unprepared the economy is with shocks, the more the country will suffer. Another point is that bad luck creates disincentives for people. For example, if an economic growth plan is set to be implemented and unexpected happenings occur, people will be disheartened that the plan can be still carried out. Thus luck is important for economies as it dictates whether expectations will be positive or negative. Easterly presented the importance of luck in simple logic. Countries should entertain the concept of luck as it relates to the basic concept of human existence the survival of the fittest. If a country is not fit enough to be adaptive with economic and other types of disasters, the less possibility it has to achieve development and growth.
With luck, those on the top may fall down and those on the bottom may rise up. A country doing good for a decade may not do well in the next decade because luck is ranging 50-50 percent. The country not doing well in that decade can announce that they will be doing well on the upcoming decade and that the other country is expected to fall down. This is the concept called mean reversion which is used by countries to uplift expectations of one and demonize expectations on the other. Funny it is but the mere statements of leaders and scholars could greatly influence expectations of rich and poor countries. The gut feel can create domino-effect on its own businesses and people and on other economies as well.
However, growth is not just a game of luck. Although many panaceas have failed us to combat poverty, it is not logical to base our explanations out of the uncertain. There must be other explanations on why growth did not persistently happen to majority of poor countries and some of them are explained by Easterly on succeeding chapters. Poor countries should not be disheartened and totally focused on the short-run effects of disasters rather they should focus on the long-run effects because they are all that matters. Attaining growth is a long-term objective that should not be solely dependent on the concept of luck because there are other set of solutions aimed at targeting growth.
GOVERNMENTS CAN KILL GROWTH
In this chapter the author closely examined the role of government in pursuing economic growth. The previous chapters pointed out the shortcomings andor mistakes governments commit in the light of providing general incentives that are critical in pursuing growth. It is not scholarly to blame non-growth to the bad luck (as previously discussed in chapter 10) because remaining poor is not something dictated only by fate it is an effect of bad policies and bad practices of a bad government.
The six factors that kill growth are high inflation, high black market premiums, high budget deficits, strong negative real interest rates, free trade restrictions and government disservice. These concepts are already pointed out in previous chapters but here each are discussed more in-depth. High inflation rate creates disincentives for the people to hold money because there are lower returns for holding such. There will be disincentives for people to deposit money on banks because the interest rates banks offer are way too much lower than the rate of inflation each year. In return, the avoidance of money may cause production inefficiencies because money is a critical input. Another mistake that can kill growth is creating a high black market premium. Transactions in the black market operate at a convenient way for people to earn larger money than in the official market. High black market premium creates incentive for people to engage transactions in the black market than in the official exchange rate market because of higher exchange rates offered. As a result, people will find places where they could sell their outputs at a higher price a prelude to smuggling of goods to have greater returns. Thus a disincentive for people to engage in legal businesses in which no real economic growth will happen.
Budget deficit, as mentioned previously, is an impetus for governments to borrow but also an effect of that borrowing in the future. Persistent budget deficits make people fear future tax hikes because the government has all the power to increase them when needed. With this, the people are rethinking if they are going to invest their money because an additional investment and higher income would mean higher taxes for the government to cope with deficits and to pay debts. Negative real interest rates can paralyze banks because depositors will run out from saving in banks during hard times especially when inflation rate strikes high. Deposits are the main source of credit funds for investments. Without which, the economy will slow down and thus slow growth. Since depositing money when there are negative real interest rates will bring nothing but losses, we can consider money in banks as assets subject to tax. Another way to kill growth is for government to close the country through trade barriers. Aside from expanding the choices of consumers, trade theoretically creates a competitive world market wherein prices will be competitive and flow of resources is free in between countries. Thus trade interference will bring pricing distortion and causes a country to be inefficient in terms of use of their resources. Since people act upon incentives, governments should create incentives for its people to work, to invest and to cooperate. This can only be achieved if the government is successful in providing even the most basic necessities of its citizen. Without public utilities like roads, water, electricity and others, the government actually kills growth because this uncomfortable condition discourages entrepreneurship. The causes of disservice may be due to corruption which will be discussed in the next chapter.
However, it should be noted that the policies suggested in one country may or may not work effectively for other countries in achieving growth. The problems should be well identified and measures should be aimed at solving them at minimal incurring negative effects.
CORRUPTION AND GROWTH
Corruption is a political issue that has adverse effects not only on political order but also on economy. From the previous chapter, we know that corruption results to government disservice and lack of service for the people which eventually lead to killing incentives for entrepreneurship. Greed can be considered innate to us human but the level of seriousness for some countries is higher than the others. Countries have institutional differences thus some countries may have provided stronger incentives for officials to be corrupt than the others. Another issue discussed is the impact of corruption up to what degree does corruption negatively impacts growth
Corruption does not only happen in higher officials such as president and cabinet secretaries but also in lower and local positions such as government employees like policemen. With the power the government system has bestowed on top of police heads, people may be afraid to contradict them even when they abuse power. As a result, bribery is the main business of police especially on poor countries.
Corruption may or may not directly impact growth because it may impact other factors (budget deficit, negative real interest rates, etc.) which eventually have direct connection with slow or non-growth. As an example, overstating budget expenses of government institutions will mean disservice to people because of higher expenses but lower quality of service from government. Aside from disservice, this would contribute to budget deficits since more must have been invested in other services. That is why statistics show that most corrupt countries have high budget deficits.
It has been mentioned that corruption is done not only by top ranking officials but also by low rank employees. Easterly characterized the difference of the two because the have differing means of stealing money and impacts on the society. Decentralized corruption is when officials, high and low ranking, have no one systematic way of sucking money. Each has their own means and each is competing with other corruptors, thus, more money is put on the hands of these many corrupt officials. Unlike with centralized corruption, there is a systematic channel wherein the beneficiaries of ill-gotten wealth are identified and the amounts are specified. It is like having an organized mafia inside the government. If more and more top-ranking officials are engaged in corruption activities, the less likelihood they will be punished. And even if the state was able to prosecute one corrupt official (even if he is the most powerful among others), the corruption will still not end because more corrupt will just rise up. Corruption, hence, can be a system or culture of governments especially when it is centralized. At the light of centralized corruption, Easterly stressed out the concept of optimal corruption in which he implied that being too aggressive in corruption will just lower the collection of bribes and ill-gotten wealth because the state may revolt. This may be why top to down centralized corruption does not necessarily mean negative growth. Impliedly, centralized corruption aims to improve growth so that more can be corrupted in the future. Thus it is favorable to do decentralized corruption because money is much more accessible (in form of money, foreign aids and commodities) and amount of money that can be extracted is higher as a result of thinking that each only has small negative impact on the economy and that they do not care whether there will be growth or not.
Corruption in general can be alleviated through setting-up quality institutions in wherein there is real transparency and establishing policies that will eliminate incentives for corruption. Although corruption is proven to be ubiquitous, it can be alleviated through institutional reforms.
POLARIZED PEOPLES
Much has been discussed about the incentives for growth and in this chapter the focus will be the reverse incentives to kill growth. Governments are not fully dumb of their actions and some may actually see the results of their policies from the very start. In economics, everything has trade-offs and policies are good illustrations on these. If the government knows that one trade-off of a policy is negative effects on growth, then what are the incentives to pursue the policy
It is wrong to hastily conclude that politicians destroy growth because they act according to incentives of engaging in corruption activities. It should be not explained this way because growth per se must be an incentive for them to support growth, so that they could have larger takes in the future. One fact that we are missing is that government is not homogenous it is a collection of politicians representing different factions. These factions have different point of views as well as varied self-interests. The concept of tragedy of the commons can be applied in this scenario. The more stakeholders there are in a policy, the more conflicting the effects of the policy will be, given that stakeholders have different interests. Politicians represent the interests of their faction and the more faction there is, the harder it is to decide policies. Thus there may be always a group that is negatively affected when a policy has been passed. In a way, it can be said that a too democratic country often experience tragedy of the commons.
But autocracy should not be seen as the best possible solution to address this problem because aside from it will heighten the sentiments of groups, autocrats may just also conciliate multiple interests. Thus the debate should not be democracy versus autocracy but rather on the strength of central government in controlling the situation and the heterogeneity of stakeholders. It is easier if there are no conflicts of interests but this idea should not be entertained as this may seem to be impossible. Thus the choice will be between having a strong central government with supporters in consensus or a weak central government made up of polarized factions.
The governments are torn between interests of the people and the strong groups are favored. Groups with voice heard over the senate and congress have stronger lobbying powers than the people in remote areas. Political favor is the tool for people to have what they want. So it must be the rich and powerful who have the favors and the opportunity to influence policy decisions. With this, the policies will bring benefits to the rich and powerful at the expense of the poor and voiceless. Supporting the rich and powerful will, in return, bring politicians incentives due to future favors they could get in times when they need it especially during elections.
Policies aimed for growth will achieve their objectives if and only if class conflict and ethnic tensions are not present. If the extremes are undesirable then it might be the middle that is desirable. Middle-class consensus can result to good institutions, good economic policies and high economic growth, just like what statistics has been saying. In a middle-class consensus, there are minimal ethnic differences and similarities in interests. And this similarity will solve the tragedy of the commons the policies are favorable for all. Thus a middle-class consensus can create incentives for growth from creating pro-growth policies to giving incentives for people to work. The wealth should not be concentrated on few people belonging while little was left on the masses. Redistribution of income should be done until the government achieves a society of middle-class.
CONCLUSION VIEW FROM LAHORE
Extremely poor countries like Pakistan may seem to be hopeless as every aspect of Pakistani life is challenged. Low technological advancements, low quality education and low enrollment turn-outs, poor and unused infrastructures, large budget deficit, corruption, and others characterize the grim situation poor countries experience. The problems are way easier to point out because it can be seen but what are more important and hard to deceive are the solutions to these problems.
Throughout the discussion, piece by piece Easterly was able to point out what went wrong in poor countries. The solutions are wholesome they must work hand-in-hand in order to be not astray from the path to growth. The solutions (not panaceas) that the author rigorously discussed can be summarized using three points of views government, donors and private households and businesses.
Perhaps the most critical and central agent for economic growth is the government because it is the one responsible for policies that affect the economy in the short and long-run. It is the job of the government to provide incentives for people and businesses to invest in education and technology to help pump up the economic growth. However, this is hindered by culture of corruption and polarized societies so the government should devise ways and decide policies which will bring out greater good and not necessarily good for some people only. Second point of view is of the donors of loans and aids.
To really combat the problem of poverty, donors should be cautious about their loaning policies and conditions because loan is not a panacea for growth and that it may only just bury poor countries with more budget deficits and debts. Policies should be presented first and be evaluated before giving out loans because if the policies are weak and self-defeating, nothing could be achieved and thus waste of resources. Last is the point of view of private individuals. Households and businesses should have a positive outlook and be motivated when their government is taking actions because all of the measures will be in vain if people will not respond. When a government is able to put up incentives for progress, people should cooperate so that goals can be achieved.
It may sound difficult and worse, hopeless, for poor countries like Pakistan to start again but they should also look at the brighter side of the story. Poor countries should first learn from their past mistakes and leave them behind. International institutions like IMF and World Bank already realized that the panaceas have failed and proposed that the three points should be given enough attentions. With the help of these institutions, growth can be possible as long as poor countries are also committed in achieving growth and not on receiving aids for short-term solutions. And that the government and people of these poor countries should patiently work out things because growth can not be achieved with just one shot. Growth will definitely take years of hardships and unexpected challenges.