The Elusive Quest for Growth: Economists’ Adventures and Misadventures
in the Tropics
By William Easterly
MIT Press, 2001
Globalization
and Its Discontents
By Joseph Stiglitz
W.W. Norton, 2002
Here are two books on the world economy
and the murderous poverty that separates populations of the North and South.
Both books are written by distinguished economists. Both economists, in
addition to making important contributions to their discipline, have years of
experience in the world of international development institutions. Both are
highly critical of the performance of these institutions, and of the global
economy itself, which has stranded billions in destitution. And both conclude
that what is most needed to improve that performance is neither more resources
nor perfected markets, but better political arrangements: in a word, democracy.
Where
they differ—as a matter of emphasis—is on what needs to be democratized.
William Easterly focuses on improving government accountability and
representation within developing countries. Joseph Stiglitz
focuses on increasing the accountability and representation of global economic
institutions. This difference in focus is less impressive, however, than the
centrality of democracy to both accounts. Treated as mutual complements,
indeed, their composite view comes remarkably close to one line of progressive
response to globalization. The destructiveness of world capitalism owes to its
indifference to humanity. Ending that indifference requires political
representation for all affected interests. And such representation means more
democracy. This view should be of particular interest to labor and its friends,
and we conclude with a sketch of some of its implications.
William
Easterly served for sixteen years as a staff economist at the World Bank,
before being forced out—or strongly encouraged “to find another job” (x)—after
publication of Elusive Quest. The
book sums up his experience at the Bank, and offers a masterful narrative of
how economists’ understanding of economic development has evolved over the past
50 years. Even as he is devastating in his criticism of much development
practice, Easterly is at pains to emphasize the essential good-heartedness of
its practitioners. He compares development economists like himself to those
mythical heroes who fruitlessly searched for the Golden Fleece, the Holy Grail,
or the Elixir of Life. Their failure has been noble, even as it has been nearly
complete. The surprising failing that unites disparate development efforts, in Easterly’s view, is that the economists prescribing them
did not take seriously enough their own basic axiom—that people only respond to
incentives, or that “[p]eople do what they’re paid to
do” and “what they don’t get paid to do, they don’t do” (xii). Instead of
ensuring incentives, development theory and practice has often focused on
building capacity: providing capital for investment, support for schools, and
inexpensive condoms for population control. But without the right incentives,
resources go to waste: capital is spent on useless dams, educated citizens
become lobbyists, and kids use the condoms as water balloons.
Of
course, providing the right incentives requires a reasonable view of how economies
work, and aid efforts have frequently come up short in this respect. To this
day, for example, a huge amount of development aid is directed to increasing
investment in plant and equipment, as though capital accumulation is the key to
economic growth. The trouble with this “capital fundamentalist” view of growth
derives in part from its inattention to incentives: investment assistance can
always be misused. But there is a second problem, and Robert Solow later got a Nobel Prize for discovering it the late
1950s. As an economy grows, the benefits from adding more machines decline
(“diminishing returns” set in). So a country that starts with a large pool of
surplus labor and only a few machines might benefit from their initial
increase. But as employment increases, the growth rate will fall if the workers
are simply given more and more machines to work with. Unless labor is used more
effectively—which means technological change—the growth rate will eventually
decline to the rate of population growth. In short, the key to long-term growth
is technological change, not capital accumulation.
But
what accounts for technological change (and increased skill)? Here is where the
accumulating understanding comes into play. Over the past 15 years, research
about economic growth and development
has sought to understand the economic roots of technological innovation
as well as the public policies and political institutions that favor such
innovation. Easterley’s narrative of development and
its failures brings together three insights from this research: (1) new
technologies and the right mix of skills are essential for economic development
(they sometimes bring what economists call “increasing returns”); (2) public
policy matters to achieving those benefits, which do not come from the market
by itself; and (3) political institutions—including democracy—matter to getting
the policy right.
New technologies and skills are
especially important to economic development because their benefits spread well
beyond the firms and workers that use them. Technologies embody knowledge, and
when a firm introduces a new technology, that knowledge spreads (“leaks”) to
other firms, and sometimes enhances the productivity of existing technologies.
Moreover, when the skills of different workers are complementary (when
different skills “match”), the benefits from one skill enhance the benefits
from others.
When there are substantial interdependencies of these kinds—with spillovers of
knowledge and a need for matching skills—economic development is essentially a
social problem: the coordination of separate efforts rather than more perfect
market competition, becomes the key to growth. If most people in your economy
are skilled, it makes sense to get an education, because your skill can be
combined with theirs in ways that bring you rewards while raising overall
productivity. But if most people in your economy are not skilled, it makes
little sense to get an education, because your investment will effectively be
drained away by the lack of investment by others. When an economy faces such a
“poverty trap,” individual incentive seekers acting on their own will not act
in ways that promote economic development.
Turning poverty traps into
self-sustaining wealth generators is what kick-starting growth is essentially
about. Here Easterly sees a positive role for government. It needs to stabilize
the macroeconomic environment, provide the transportation and communication
infrastructure needed for commerce, and ensure a safety net of essential health
and other public services. Most delicately but important, however, government
needs to pay for behavior not yet rewarded by the market, but needed for
economic development: to subsidize research in and development of new
technologies, support the provision of relevant skills, and foster foreign
investment that imports new ideas. It needs, in short, to invest in activity
with large social benefits whose market rewards are insufficient to make it
pay.
But
any government that is strong enough to play this constructive role in economic
policy is also strong enough to do real damage. To avoid the damage, government
must be held accountable. Easterly’s views here are
broadly conventional, and market oriented. It is critical that government not
play favorites, and that the public be organized enough to insist on government
accountability. It is essential that property rights be established, that
interest rates are positive, that there is enough education around to exploit
technology, and enough new technology to stay current with trading partners.
But
being able to make the right choices here, and being accountable to the broader
public in making them, requires a greater measure of democratization than is
common in poorer countries. This, finally, is what Easterly identifies as the
barrier to their growth: the political institutions needed to identify and
implement the right sorts of policies are missing. Corrupt governments, and
societies polarized by class and ethnicity are the norm, and this norm is bad
for growth. To be sure, development requires institutional constraints on
government, including the rule of law and independent central banks. But
because development also requires affirmative government action, these
institutions of constraint are not enough. Democracy, too, is required to
ensure that a government with sufficient capacity to serve the population does
not turn into its corrupt master.
Joseph Stiglitz
takes a quite different tack in Globalization
and Its Discontents. He says almost nothing about politics within
developing countries. Instead, his attention is focused almost exclusively on
the international development organizations, which he believes do not have the
interests of the developing nations at heart, and need fundamental reform.
The
International Monetary Fund (IMF) is a target of special wrath. When countries
are in trouble, the IMF applies a nearly unvarying agenda of deregulation,
trade liberalization, privatization, deflationary monetary policy—a “Washington
Consensus” on development policy that makes little economic sense and reflects
overwhelming indifference to the fate of the peoples of the South. Summarizing
his experiences with the IMF: “Decisions were made on the basis of what seemed
a curious blend of ideology and bad economics, dogma that sometimes seemed to
be thinly veiling special interests.” But the problems extend beyond the IMF.
While the World Bank’s policies have in some measure been corrected, it
continues to play an unwelcome supporting role in enforcing the Washington
Consensus. And such was always the purpose of the WTO. Thus all three members
of the trinity of global financial governance and development have set the rule
of the game of international development and cooperation in ways that largely
serve the interests of the more advanced countries—and especially commercial
and financial interests within those countries.
This
matters for Stiglitz not only out of concern for
economic justice, but because of basic economic principle. In real world
markets, actors do not behave with the omniscience attributed to them by
economists. And real world countries vary in the institutional infrastructure
needed to support markets in the first place. With imperfect information and
markets, “there are, in principle, interventions by government—even a
government that suffers from the same imperfections of information—which can
increase the markets’ efficiency” (219). Most poor countries, for example, have
poorly developed financial institutions. Forcing them to “liberalize” those
institutions by opening their economies to world financial flows can be
expected to undermine fragile credit institutions exist, while shifting rules
on credit away from those local business have come to rely on. Overlaying such
liberalization with a credit crunch, as happened in the East Asian economic
meltdown of the late 1990s, can have truly disastrous effects. And among the
world’s poorer countries, those of East Asia
were in much better shape to sustain such disruption than most others.
The first step that is needed
in development practice, then, is an end to free-market ideology, and a
willingness to see individual circumstances in their complexity and
distinctiveness. But because circumstances differ, Stiglitz
does not propose not to replace the Washington Consensus with an alternative
policy recipe. Instead he makes a philosophical point and an economic one,
which converge on the same political conclusion: “the most fundamental change that is required to make globalization work in the way that it should is a change
in governance” (226). The philosophical point is that the major global
institutions—which are needed to solve global problems of collective action—are
effectively public-political institutions,
whatever their formal status: they govern people’s lives, and their decisions
have profound consequences for the lives and well-being of billions. So they
should be governed democratically, using the standards of “accountability that
we expect of public institutions in modern democracies” (52). The economic point
is that in a world of imperfect markets and incomplete information, effective
development policy requires both good information on local conditions and broad
consensus on aims and a sense of the legitimacy of the strategy recommended to
achieve them. Getting that information and public support requires that locals
play a substantial role in formulating their development plan, and have some
autonomy in executing it. It thus requires a change in the governance of those
institutions themselves, to ensure that interests in the poorer countries are
represented.
Stiglitz says very little about how to do this. Broadly,
however, his suggestion is, first, to establish norms on transparency in decisionmaking—sunlight being, as ever, the best
disinfectant. Second, more ambitiously, to change the allocation of voting
rights at the Bank and the IMF, and the decision rules on their
country-specific recommendations, to get greater representation of developing
countries. His ideal is a system in which “all countries have a voice in
policies affecting them” (22). Third and finally, round out the cast of
international institutions to address world problems extending beyond economic
development. So, keep the UN as a multilateral mechanism for addressing
security needs. But also charter new multilateral institutions on health and
the environment—again with better representation of the community of
nations. In sum, move toward greater
global democracy by moving toward more inclusive and transparent
intergovernmental bodies, governing a greater range of problems than they do at
present.
Together, these two books are
invaluable for their informed denunciation of present global economic
governance, and their recognition of the importance of a more democratic
politics in correcting it. Where they fall short is in saying much about how
that politics should be designed, much less how it might be achieved.
Take
Stiglitz’s prescription of multiple intergovernmental
bodies, each more inclusive and representative of developing nations than the
present global institutions. But inclusion alone is not helpful if those
included are corrupt and themselves indifferent to the fate of the destitute.
As a first and friendly amendment to the Stiglitz
scheme, then, national governments need to be accountable to and representative
of their own populations.
A
minimal threshold, for example, might be evidence of secure property rights, constitutionalized speech and associative freedoms, and a
process of regular free elections to choose government. But this threshold can
be passed by governments wholly dominated by economic elites who compete for
control of government but show little concern for their country’s poor. Merely
bringing representatives of such governments to some international table of
discussion cannot then be plausibly expected to ensure that “the poor have a
say in decisions that affect them” (216).
A further friendly amendment,
then, might be to ensure a place in policy discussion for organizations and
interests beyond those reflected directly in electoral politics. So that means
a role for interest and advocacy groups—on the environment, health, labor
standards, women, human rights, etc.—and secondary associations of different
kinds—trade unions, community organizations, business federations, etc. In most
democratic countries, and certainly in international discussion, such
non-governmental organizations (NGOs) currently play an essential role in
establishing the terms of public discourse and in promoting, formulating, and
monitoring the implementation of regulations.
Neither
Stiglitz nor Easterly say much about such groups
though on the analysis of both they are essential to economic development.
These are, after all, the characteristic sources of the local knowledge that Stiglitz sees as so essential to making the right
contextual calls in structural policy. They are, for good or ill, key to
intensifying or domesticating the ethnic conflict that concerns Easterly. In
virtually all states, developing and rich alike, they are essential service
providers to the poor. In the South, they often are the lead organizations
through which development support runs. And—as in the case of organizations
involved in certification arrangements for labor and environmental standards
—they are playing a large role in an emerging global system of standard setting
and enforcement.
For
all these reasons, as well their more narrow representative functions, NGOs
presumably should be included in any account of global democratic governance.
But that inclusion generates its own problems of accountability and structure.
Whom do the NGOs represent, and to whom are they accountable? What guards
against their corruption? What weight should their views be assigned, relative
to more formal public authorities?
Finally, and irrespective of who is
involved in discussion, there are obvious questions of power. Let’s say
discussion is widened, one way or another, to include representatives of
nations and groups now neglected. Let’s say even that that discussion is made more
transparent. Democracy is not only about transparency and inclusiveness in
discussion, but about fairness in decision. When the wider discussion ends, who
gets to decide what is done, and how? What if less powerful interests win the
argument, recommending a course of action that imposes losses on the more
powerful? What happens next? Stiglitz, who is the
more insistent on greater inclusion, says nothing on this matter, leaving the
impression that he thinks the right answer will be self-evident enough to be
self-enforcing. But common sense and his own experiences in politics tell us
otherwise. Worse even, without assurance of fairness in decision, there is no
reason for participants in the discussion to be forthright with their views.
Stiglitz and Easterly are thus much more successful at
declaring the importance of political questions in global development than they
are in saying how they might be answered. But so be it. They are hardly alone
in their effective silence on world-democratic design, and getting the
discussion focused on democratic politics is achievement enough. What is of great relevance to labor and its
friends is the shift in the terms of discussion that these books recommend. In
matters of global poverty and internationalization the real questions are
“about democracy, stupid”—which describes a theoretical and political space
that labor should be more than happy to enter. After all, where will a new
democratic international politics come from, if not from labor and other mass
democratic movements, presumably in critical but supportive relation to
progressive elected governments?
What
remains urgent is that labor rise to this opportunity on an international
scale, with new intensity and openness. That means at least three things. One, far
more investment, particularly by labor movements of the north in international
labor organization and communication, so that an international worker
perspective can be stated. Two, more deliberate efforts by labor to include the
important non-labor NGOs and mass movements in its discussion, so that the
worker voice is a social voice. Considering the current distance between labor
and global environmental groups, for example, that is no easy task. Still, it
is politically essential. Third, more effort to limn a positive architecture of
international governance, in which these voices are not just heard, but
increasingly decide, development decisions. Moving on this agenda, of course,
is the work of a lifetime. Credit these two books, whatever their limits, for
helping bringing it into view.