"The Elusive Quest for Growth" by William Easterly

The Elusive Quest for Growth by William Russell Easterly

Subtitle: An Economists’ Adventures and Misadventures in the Tropics, Cambridge, Massachusetts: MIT Press, 2002: 

The Roman philosopher Seneca defined luck as the moment when preparation meets opportunity, and in this excellent book Easterly analyses some big-bang moments of development luck, and even extends the concept to include the possibility of unpreparedness meeting opportunity—for instance when not being held down by merely recent technology allows for a better use of the very latest. 

The book makes a great case for PPPs Private Public Partnerships or, as one famous president of Venezuela would have put it, “It is not the private sector or the public sector but just the opposite.” 

The book explains very well the need for developing the right incentives for development, although in doing so it might not emphasize sufficiently those other variables that help the sustainability of development, such as a reasonably equitable income distribution. 

Also, a book that discusses the benefits which development receives from “knowledge leakage” but also promotes strong intellectual-property rights as incentives must, obviously, enter into some contradictions. But, then again, with no contradictions, what would be the role of luck? 

The book is crystal clear about the destructive role of bad governments. When Easterly calls for banning the concept of a financial gap, I feel much at home with my arguments against debt-sustainability analysis.

When the author writes, “Thinking about luck is good for the soul. It reminds us self-important analysts that we might just be totally witless about what’s going on,” I know that William Easterly is one of those rare Ph.D.s whom I could gladly consider inviting to my “Guaranteed Ph.D.-Free University.” 

PS. A quite interesting spin on the issue of whether “To write or not to write … by hand” is made by William Easterly in his book The Elusive Quest for Growth. In it, when he argues, “the productivity gains of the computer are slow to be realized . . . because there are still too many traditional people out there with ink and paper,” he is actually making the point that perhaps we should prohibit handwriting as such, so that the world can move forward.

[Jim, my editor: “Plato suggested—I suspect jokingly—that the invention of writing was a bad thing that ruined human powers of memory.”]

Extracts from my Voice and Noise 2006.

The World Bank and IMF, should give the whole world, Mother Earth and the Global Rovers, more voice at its Executive Boards.

Many seem to opine that if only the votes and the composition of the Executive Boards of the World Bank (and the IMF) reflected better current economic size, then global imbalances had a better chance to disappear, like magic. It might not be as easy as that, and just for a starter why would GDP or the market share of the world trade be more important than market capitalizations for assigning voting power. Also if we are at it, why should we not then go for a full Monty on democratic reform and use population as the basis?

If and when a possible reshuffling of the current 24 Executive Directors should happen, I hope it will be to give representation, perhaps not to Civil Society, which is sort of intangible, but to that very tangible piece of land, water, and air that we all know as planet earth.

Although we proudly name ourselves the World Bank, the fact is that we are more of a “Pieces of the World Bank”, with 24 Executive Director representing parochial interests. As a consequence I sadly had to conclude in that the World itself, call it Mother Earth if you want, in these times of globalization, is in fact the Bank’s most underrepresented constituency.

This needs to be fixed, urgently, as we need to be able to stimulate a profoundly shared ownership for the long-term needs of our planet, if we want to survive as a truly civilized society, worthy of the name civilization. As I see it, adding a couple of truly independent seven-year-term Executive Directors, whose role would be to think about the world of our grandchildren, way beyond the 2015 of the Millennium Development Goals—could be what the World Bank most needs now.

And, while at it, we should perhaps also ask one of the current Directors to give up his Chair for a new constituency—call it, if you will, the Constituency of the International Rovers, by which I mean all those workers, skilled or unskilled, legal or illegal, who nowadays represent jointly one of the largest economies of the world. By the way, the first thing that the Global Rovers’ ED would need to do is to make clear the enormous difference that exists between an immigrant with a long-term plan to emigrate from motherland and forever assume a new nationality, and, on the other hand, a temporary worker who just wants to make a buck in order to help his family to a better life, and who wishes with all his heart and soul to return home as soon as possible. Forcing temporary workers to swear allegiances to foreign flags, just so that they can have the right to a better income, cleaning toilets, seems only like a new generation of artificial trade barriers.

Currently we are too stuck in the geography of the non-globalized world to be able to see what is truly happening around us. For instance, El Salvador has about 2 million of its people working abroad, more than a third of its total workforce and so if to the current GDP figures of El Salvador we add what these workers are earning, gross, well then perhaps El Salvador’s growth rate could actually be higher than China’s. And you tell me, why should we not do it this way? Is not an El Salvadoran still a real El Salvadoran just because he or she is working abroad? The internal emigration in China from west to east might take a Chinese from 50 to 150 dollars per month, but the El Salvadorans going south to north go from 120 to 1.200, and no one is heard complaining about an over or undervalued currency.

(Extract from a presentation of Voice and Noise at InfoShop on May 16, 2006)

Lost in the water of globalization

I have just returned from a trip to Central America (October 2000) during which I noted that an important issue in the debate on how to improve public services like water and power was the awarding of concessions to international water companies. I thought at that moment, not without some sadness, how some cultures that hundreds of years ago were expert at building and managing their aqueducts have today simply given up even trying.

Having three daughters of different ages, I have several times had to watch a movie aimed at adolescents called Clueless (in fact, it’s a great movie, and I might be using my daughters just as an excuse). In this movie a young girl tries to pass the exam for her driver’s license. After being severely reprimanded by her instructor for not knowing how to park her vehicle, she curtly answers back with the excuse that valet parking could be had everywhere. I feel that today many of us react in the same way to the difficulty of improving our public services and making them more efficient: “why try so hard when foreign investors can do it?” 

Evidently it is very often necessary to invest a considerable amount of resources or advanced technological know-how in order to offer an efficient and economically viable public service to the end user. In these cases a country may not have any alternative but to call on international investors and offer them a deal. However, in those cases where the only thing that is required to make a project go forward is good administration and a sound strategy for creating and maintaining relationships with users, specifically addressing issues such as quality and tariffs, it is difficult to condone the lack of desire to find a local solution to a local problem. One asks simply where we stand on our ambitions as a nation. 

You may ask what, for example, the administration of water systems or the distribution of power has to so with being a nation. The answer is probably “directly—nothing.” However, building a nation is not easy and requires at a minimum that its society learn how to resolve certain problems on its own. Taking the easy way out and simply calling in foreign assistance in order to solve problems in the water or power sectors could be compared to parents doing their child’s homework to insure a good grade while at the same time not allowing the child to learn how to do thing on his or her own.

Much of the pressure that creates the conditions for the sale of concessions of public services to multinational companies comes from multilateral agencies. You know the saying, “Do not give a man a fish, but teach him instead how to fish”? On occasion I ask myself whether these agencies “are not really asking developing countries to sell their fish-rods and their oceans. 

In Venezuela, we are close to renewing our efforts to privatize certain public services. In this sense, I feel it is important to ask ourselves without any inferiority complex, whether international investors should or should not have access to these services at all. I make reference to complexes simply because I feel many of us suffer from a “globalization insufficiency” complex that now exceeds that of the ardent nationalism that affected us a few decades ago.

What should we do then, in order to insure that national interests are always present in the privatizations that loom in the future? Above everything else, it is important to recognize that the way the privatization process is designed will either attract or scare away national investors. For example, if in the case of the privatization of a power distribution network the state wishes to obtain a large price for selling the utility which it has owned, a price which must then be passed on to the customers of the network itself, the total costs involved will be so high that they will automatically disqualify or discourage any local investor. If on the contrary, use of the power-generation assets were awarded on the basis of who offers to charge the end user the lowest possible rate, local investors would have a better chance of participating. 

Finally as no one is prophet in his own land, looking for foreign support I wish to make reference to a declaration I heard by David Montgomery, Viscount of Alamein, son of Field Marshall Montgomery (Monty) and the new British Ambassador to Mexico. He maintained that he simply could not understand why Argentina had sold all its public utilities to foreign investors. I do not understand it either, but what I am sure of is that unless we wish to lose our country in the waters of globalization, we must define with utmost clarity some strategic borders, and I don’t mean just our geographical ones. 

How depressing! With so much to be gained from globalization, why do they have to do it the wrong way, and why do they have to start doing it wrong just here and now?

Translated from El Universal, Caracas, October 27, 2000

As published in "Voice and Noise", 2006

My insecurities about the social security debate

The following is extracted from my Noise and Voice of 2006, a book which reflects on what I discussed and opined during my two years as an Executive Director of the World Bank 2002-2004

About disseminating our knowledge

It really is not possible for the value of investment funds to grow, forever, at a higher rate than the underlying economy, unless they are just inflating it with air, or unless they are taking a chunk of the growth from someone else. Therefore when we observe how many Social Security System Reforms are based on the underlying assumption that they will be growing 5 to 7 percent, in real terms, for ever. I wonder when we are going to use our knowledge, and inform the world that this is just plain crazy.

When we speak of expected returns, let say a real 3%, this is just an average of a distribution curve where there are a lot of winners, with higher returns, and a lot of losers, taken to the cleaners. Knowing this, how come we allow the debate on Social Security reforms to use the averages? In systems where you are supposing to pay someone to manage the funds, you should expect the managers to produce different results. Yes of course the returns could be average, but for that you just buy a stock index, and pay no fees.

A question

Are there any real differences between a pay-as-you-go, governmentally backed pension system, and a pension fund that invests completely in government paper?

About the timing and the losers

Any individual Social Security accumulation system that has the luck to start when the markets are close to rock bottom will always perform better than those systems that start when the markets are at the top. This has been the real beginner luck of the Chilean system and future generations of Chilean accumulators might not be as happy with the results as the pioneers were. 

When we now read how investment funds publicly state that they do not wish to receive more funds since they do not know where to invest them and we also observe how many private pension schemes in the United States are running for public cover, we need perhaps to ask ourselves whether the timing for those Social Security reforms that might be en route is really that good.

Those who beat the market average will always love to be on their own, and therefore the problem does always reside with the losers. The difficult question is whether in an individual security accumulation system all of the future losers have truly surrendered their expectations of receiving official assistance and, even if they have, proudly preferring to starve than to ask for help, whether the governments could really get away from their social responsibilities by answering the losers with a “Hard luck, pal, you had a private plan.” 

And so, at the end of the day, to me it seems that you might just be substituting a pay-as-they-fall for a mean-based pay-as-you-go system. So, when we add it all up, it all boils down to the same—except of course for the fees.

On Social Security in Real Terms

In order for your savings and social security investments to be worth something when you need them, the real economy must be in a reasonable condition at the time of your selling your investments. When I hear the many discussions about the financial preparation needed to accommodate for the upcoming demographic changes, I find it truly amazing how little is being said about the economy in real terms. 

Considering that there will be many fewer young ones to drive people around and shovel snow, much of today’s beautiful real estate might drop in value when the elderly start selling their houses to live close to a metro, hospital, and more reasonable weather conditions. So, before putting the money away in a private accumulation trust I think we need to rethink the whole retirement strategy.

Also we should never forget that historically, through all economic cycles, there is nothing so valuable in terms of personal social security as having many well-educated loving children to take care of you, and that you can’t, in real terms, beat that with any social security reform.

Two current updates on the social-security issue

Sir, Delphi’s (a company that supplies General Motors) problems do indeed pose a threat to public-pension institutions, but it also evidences the structural weakness of the alternative of accumulations in private-investment accounts. The fact is that when the old retire and might need to sell their stocks, the young might not be willing to buy them. 

Sir, With respect to GM’s pension woes, you claim that the company recorded a return of 5 per cent in the first half of the year, putting it on track for its assumed annual return of 9% but also that if GM’s pension funds produced the same poor returns as the equity and bond markets, this would of course have a dramatic negative impact. What is thereby implied makes a case for developing a formula that calculates how much arrogance it must take to promise to pay 9% on funds over a life span, and/or to beat the markets continuously.

PS. First, they discount future pension liabilities at high rates. Then they impose bank capital requirements which much favors refinancing the safer present than financing the riskier future. And so the squeeze is on, the squeeze is on.

PS. OpenAI ChatGPT: "Would you be able to implement a system that continuously monitors and informs us whether social security and pension funds have sufficient reserves to reasonably meet their expected future obligations?"

What the World could learn in Sri Lanka

Last week, I heard the presentation of a research paper that studies the impact of migration on growth and spatial inequality in Sri Lanka, titled Can migration be an engine of pro-poor growth?, authored in 2006 by Nobuo Yoshida, K.G.Tilakaratna and Suranjana Vidyarathne. It was a very interesting presentation but; nonetheless, after just a couple of minutes, I could not stop my mind from wandering off into the following reflections. I beg your pardon, Nobuo Yoshida.

Would this study be different if instead of looking at a map of all the very different districts in Sri Lanka we were looking at a map of the world? Can we really research migration from one country to another with the same ease we observe when the analysis is of the internal migration? Do not all the institutional restrictions and emotional biases that arise while analyzing migration from one country to another hinder us one way or another from reaching the real conclusions?

Can we analyze migration from one country to another in a globalized world if we still have to carry the flags from the non globalized world? When we study the migration from El Salvador into the USA, should we instead of looking almost exclusively into their remittances, be looking much more at their gross earnings, salaries; and thereby perhaps conclude that El Salvador, as that nation that is no matter where their people are, might indeed be growing much faster than China. If in China migration might be from west to east, from 50 to 150 dollars of income per month, El Salvador is doing theirs from south to north, from 100 to 1200 dollars per month.

The state of Connecticut showed a per capita income in 2004 of 45,318 dollars while Mississippi had only 24,518, just about half. Does this imply that when deciding upon temporary visa programs the USA should consider more where the temporaries should go? Should they go to the poorer or to the richer states? Can or should the states compensate each other for differences in migration, one way or another? Certainly if we knew more about these issues then we all stand a better chance for rationality to prevail.

Back to the Sri Lanka study, one of its conclusions is that as their internal migration goes mainly to the already congested Colombo Metropolitan Area, this could reduce Sri Lanka’s annual growth rate by 1.5 percentage point, compared with if Colombo were not over-concentrated. Would this be indicating we should start to look at controlling migration flows in the world as London does with its traffic, by officially charging a fee for passing from one area into the other and have market forces decide how much these fees should be.

And we could go on and on this route of analysis, and fight world poverty so much better, if only we could ban the flags. It is clear now that we need many of these internal migration studies, like the one on Sri Lanka, if we are ever to get a chance to understand cross-border migration.