The Mystery of Economic Growth

Letter from India, The International Herald Tribune

EDAYANCHAVADI, INDIA — Around here, in rural South India, development over the last few decades has been an uneven process.

Some people rise, others fall. Some get rich, some stay poor.

The rich build concrete houses, buy motorcycles and send their children to private schools. The poor live in thatch huts, work part-time as agricultural laborers and pull their children out of school young.

Development is an unpredictable business. The rich and poor often grow up in the same village. They are beneficiaries, or victims, of the same government policies. Their lives are determined by the same weather patterns and infrastructural constraints.

One of the central questions facing India — and, indeed, the developing world as a whole — is why some people, or countries, move ahead, while others fall behind.

An answer to this question would have huge implications for public policy. In India, torn between an attachment to socialism and a new infatuation with capitalism, it could help find a balance between the state and markets in poverty alleviation schemes.

More generally, as India continues to grow rapidly, a better understanding of its path to development might be applied to other regions of the world, where poverty is proving less tractable.

For all its temptations, however, the search for a policy toolkit toward development is fraught with pitfalls. Over the last 60 years or so, the international development community has come up with model after model, theory after theory, in search of just such a toolkit.

It has, at various times, promoted the benefits of huge, often conditional, inputs of foreign aid, the rigors of shock therapy, the virtues of free trade and the promise of the Washington Consensus (a set of policies prescribed and often imposed by agencies like the World Bank, the International Monetary Fund and the U.S. Treasury).

Yet for all the efforts to come up with a general theory of development, the truth is that economic growth remains something of a mystery. This is the conclusion of a recent anthology, “What Works in Development?”, published by the Brookings Institution. The essays lead to the conclusion that there is no clear way to ease poverty, and — as the editors, William Easterly and Jessica Cohen, state in their introduction — “no consensus on ‘what works’ for growth and development.”

Mr. Easterly, a former World Bank economist, has elsewhere shown that there is little correspondence between a nation’s economic growth and the extent to which it follows international development prescriptions. Analyzing data for 1980 to 2002, he found that countries that grew the fastest received considerably less foreign aid and spent less time under I.M.F. tutelage than those that grew the slowest. This doesn’t mean that following the orthodoxy harms development, but it does suggest that rapid growth is possible without international aid or advice.

Part of the problem, it turns out, may be the very attempt to follow a model. Progress — economic or otherwise — is a notoriously subjective phenomenon. It is context sensitive, and highly dependent on local conditions. It is, in particular, resistant to the uniformity implicit in even the most sophisticated models.

This view, once held by a fringe, is entering the mainstream. It was given voice last month by none other than Robert B. Zoellick, president of the World Bank, when he spoke of the need for “rethinking” development economics and “a questioning of prevailing paradigms.”

Facts speak for themselves. It has become increasingly evident that many of the most successful growth stories have resulted not from slavishly following an external set of policy directives, but from pursuing unconventional — and locally attuned — solutions.

The rise of Southeast Asia (and more recently China), for example, represented a repudiation of textbook views about the proper role of the government and of the relationship between markets and the state.

India’s recent growth, too, can be seen as a result of a determination to follow its own path. While it is true that the country began its climb out of socialist torpor under World Bank and I.M.F. supervision, many aspects of its growth since then contravene the conventional model. A notable example is the country’s refusal to fully liberalize its capital markets or allow unrestricted foreign investment. This refusal, lamented by advocates of the Washington Consensus, is now credited with having spared India the worst of the recent financial crisis.

Jessica Wallack, an economist who heads the Center for Development Finance, a research organization in Chennai, suggests, also, that India may have benefited in some ways from moving slowly toward the privatization of public assets (again, a contravention of development orthodoxy). She argues that, given social inequality, corruption and limited institutional capacity, rapid privatization could, much as in the former Soviet Union, have “resulted in greater concentration of wealth in a few people’s hands.”

A further example might be the nation’s Mahatma Gandhi National Rural Employment Guarantee Act, a major public works program that has dismayed those who advocate market solutions to unemployment, yet that is undeniably easing poverty in much of rural India.

Each of these policies has a price. But their salient feature (and, arguably, the reason for their relative success) is a sensitivity to context — the fact that they are responses to genuine needs, and that they are designed taking into account particular local conditions, such as the reality of corruption.

Ultimately, it is this sensitivity, this ability to accommodate context and local detail, that works best in development. The type of grinding, sweaty work it implies — time in the field, in villages and on farms, learning about cultures and social structures — is certainly less glamorous than designing overarching theories to rid the world of poverty.

But poverty is an unglamorous business. It is only fitting that the most effective way to address it would be through small, low-key and often backbreaking interventions.

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