Mar 24, 2008

Easterly on development

William Easterly has two new accessible articles. One in the American Economic Review, on institutions and economic development, and another one on what should a perfect aid agency be, in the refreshing Journal of Economic Perspectives. I have to admit I really enjoy reading the latter journal. As its website mention, it “attempts to fill a gap between the general interest press and most other academic economics journals”. It does this by offering “readers an accessible source for state-of-the-art economic thinking” that is easy to read.

Anyway, back to development. Institutions, as many instrumental variables have proved, cause growth and development. In other words, fix your institutions and you’ll grow. But how do you impose good institutions? Bottom-up or from the top-down? This is what Easterly tries to address (not answer, of course) in his AER paper. He concludes, as expected, that no clear answer exists. The imposition of a new set of laws by top-down shock therapy? Think of Russia and forget about it. It can indeed have nasty, destructive effects. So what about a bottom-up process, such as giving subsistence farmers land titles, as suggested by De Soto? Well, as Easterly explains, it didn’t really work in Africa, and that’s because these are of no use when there’s no rule of law. So doesn’t this mean we should start with imposing the rule of law, from the top? Oh no, I forgot, that doesn’t work.

In his other paper he complains about the poor quality data on foreign aid and about the fact that so much money goes to corrupt countries. He also complain that “aid tying, the use of food aid-in-kind, and the heavy use of technical assistance persist in many aid agencies, despite decades of complaints about these channels being ineffective”. As for which are the best agencies, he writes that “development banks tend to be closest to best practices for aid, the UN agencies perform worst along each dimension, and the bilaterals are spread out all along in between”.

To me, the UN development agencies do look incompetent. He explains why by writing mockingly: "UN announces new agency to combat excessive bureaucracy in foreign aid"

(thanks for the link Cam)


T-Viddy said...

I guess Easterly is not very fond of the UN agencies. Even in the "White Man's Burden' he conclusions lead the reader to belief that the UN agencies do worst in terms of aid. On other hand I would argue that possibly the UN and the development banks aid structures are too different to compare. Look at humanitarian aid. This an exclusie UN arena. From a moral perspective I would say that it is difficult to attempt to put any kind of condition on aid while people are starving. Furthermore the one-country one-vote system, changes the whole dynamics of aid distribution quite a bit. One could argue that in a one-country one-vote system, corrupt countries could collude and prevent implementation of best practices. Development banks obviously do not suffer from this problem. On the other hand, we have seen in the past the implementation of the 'washington consensus' was not necessarily the best idea either. I think that only time will tell which approach is correct....

Cam said...

Interest post Pierre - Louis and thanks for the links to the great articles from Easterly.

The whole question of whether you can impose a set of institutions on a country from the top down, or let them gradually evolve, is fascinating. I tend to agree with the latter approach. I generally think it is nigh on impossible to transplant a set of institutions from one case to another and expect development to flourish (without taking account of local conditions, that is).

For my favourite comment on UN activities, check out the following Dilbert cartoon:

Dany said...

The question is not just multilaterals vs UN, but also multilateral vs bilateral. My collegues at the IADB did a cool paper showing that the first seems to be better, because is less likely to be influenced by political preassures. If interested:

Sebastian said...

Interesting Papers. Though it amazes me that this simple but smart paper is fourth coming in the AER. In any case I came across an interesting newspaper article on Southern Africa. It also touches to some extent the impact of rising commodity prices, missing or badly designed land reform and Zimbabwe's mess.

Maybe one of the biggest problems is not that we do not have enough answers to economic problems (in fact I believe we have many - sometimes even too many -) but we have never really understood how to implement the implied policies properly. In this sense Easterly catches a crucial point which is certainly still up for research.

Dany said...

Two requeriments to publish in AER (unless you write a superb piece of research):

- Talk about a hot topic.
- Be a bif name.