NOTE: The Growth Economics Blog has moved sites. Click here to find this post at the new site.
A number of posts/comments have been floating around the last few days that deal with the goals or the World Bank. Lant Pritchett published a piece that asks whether rich countries are in fact good partners for poor countries looking to develop. Pritchett is worried that rich-country development agencies (including the World Bank) have altered their focus from promoting overall economic development, and “defined development down” to be only about alleviating the conditions for the extremely poor – those earning less than $1 per day.
Pritchett suggests that the reason for this is a “post-materialist” attitude within rich countries. More crudely, you could say that this is another example of rich countries attempting to impose their goals/values/hopes onto developing countries. We in rich countries in general – and most likely highly paid development agency workers specifically – have the luxury of saying that material economic growth is not that important. Pritchett argues that this is to ignore the goals/values/hopes of actual people in those developing countries, who very much would like some material economic growth, please.
I’m very much on Pritchett’s side on this, with a caveat I’ll get to later in the post. I wrote a post back when I started this blog on defining development economics. I contrasted “development economics” with the “economics of poverty”. Development economics, to me, is the study of what allows countries to shift from poor, agricultural, rural economies to rich, industrial, urban economies. It is “development economics” in a classic sense, but today you’d probably call it “growth economics” or “macroeconomic development”.
The economics of poverty is about the constraints facing poor people in un-developed economies, how they cope with those constraints organically, and what kind of interventions will alleviate these constraints. The problem is that what I call the economics of poverty is what everyone else calls “development economics” – field studies and surveys in poor countries, running randomized control trials of interventions, and the like.
Pritchett is arguing, in my mind, for the World Bank to return to thinking about growth economics, or about development in the classic sense. Looking for projects like ports, roads, energy generation, and the like. Scale-intensive activities that need someone to coordinate the investment, and investments that will not take place organically because they are essentially public goods. Things that might allow or push economies into sustained growth.
Pritchett’s article generated a response in defense of the World Bank’s focus on poverty alleviation. The main example I know of is here, by Emre Ozaltin. He argues that Pritchett has a “growth fetish”, and that we have evidence that this does not lead to development. That’s debatable, but Ozaltin is correct that this is not an either/or decision. One does not have forgo poverty alleviation to focus on growth, or vice versa.
But Ozaltin also overstates the case for focusing on poverty alleviation. He says, “The sum of the activities in which we are engaged are not incidental to the challenge of development. They are development. For example targeting, investing in health and education, and doing so in multisectoral and coordinated ways, are all critical to growth.”
No, they are not. We have no convincing evidence that improving on those dimensions leads to growth. Yes, we have hundreds of well-designed studies showing how specific interventions improve health or education outcomes, but that does not mean they lead to economic growth. Acting to alleviate poverty is a noble, useful, moral activity. But you do not get sustained growth as a freebie on top of it. What Pritchett is arguing (I think. I’m putting words in his mouth here.) is that the Bank has presumed that their poverty alleviation efforts will generate growth as a byproduct. They haven’t, and most likely won’t. Growth is a distinct dimension of development different from poverty alleviation.
Now, here is my caveat to supporting Pritchett’s position. Who cares if it is specifically the World Bank that provides that infrastructure investment supporting economic growth? If the aims and goals of the World Bank have changed to poverty alleviation, fine. Let that be their focus, and the business of promoting growth can be left in the hands of other entities.
This has essentially already happened, and it isn’t clear why one should try to stop it. Tim Taylor had a nice post on the World Bank. In it, he links to research showing that the World Bank is rapidly running out of countries that qualify for its help. Further, official development assistance (ODA) is being dwarfed by foreign direct investment, remittances, and sovereign bonds as a source of investment funds for developing countries. Development banks such as the Inter-American Development Bank, the African Development Bank, the Asian Development Bank, and the new bank proposed by China are all in the business of lending for large infrastructure projects. Let them.
I think Pritchett is wasting his time here, trying to turn the World Bank to a new (actually, old) heading. The Bank is a gargantuan organization, and has reached the point where self-perpetuation is as important as the actual mission. This isn’t to trash the World Bank, it’s no worse than any other large organization on this front. But if the nature of the interventions that the Bank wants to undertake has changed, so be it. Argue instead for increased funding to the existing development banks. Argue for the US to drop its opposition to the Chinese-led development bank. It may be useful or best to separate the poverty alleviation and growth-promotion, anyway. But you need both. Poverty alleviation alone is not a robust path to long-run sustained economic development.
I found this claim somewhat startling, since it seems intuitive that unhealthy and uneducated people would be less productive. Looking around, I can find some papers like The Economic Burden of Malaria (Gallup and Sachs) that seem fairly convincing to me (finding intensive malaria associated with 1.3 percentage points slower per-capita productivity growth in a cross-country regression). Are you less convinced by arguments like this, or what?
Yes, I am less convinced. The Gallup and Sachs stuff has all the issues of the x-country growth literature – lack of identification, fragile results that can be overturned by picking the right covariates, etc.. Put it this way, showing that places with malaria grow more slowly does not mean that *malaria* is the reason they grow more slowly. It might just be a spurious correlation.
In general, it is impossible to get reasonable estimates of the effect of health or education on productivity to generate a big enough difference to explain the South Korea to Tanzania gap in living standards (20 to 1). You might get a 2-to-1 ratio from the differences in health or education.
Which means that improving health and education are excellent things to do. First because they are valuable in and of themselves, and second because perhaps you could double living standards. But – that will generate the kind of transformative growth that saw Korea jump to close to rich-country standards in a few decades.
Ah, ok. Yes, your recent post clarified this for me. So you really meant “no convincing evidence that improving… leads to transformational growth.”
I’m not very familiar with the growth economics literature, but you said “no convincing evidence” as though there was more convincing evidence that other approaches were likely to lead to transformative growth. Do you have any pointers to such evidence?
I’m very sympathetic to your worries about cross-country regressions, but I’m not aware of much better ways to do country-scale causal inference here. And on the other hand, Gallup and Sachs included a number of controls, found virtually the same malaria effect in a number of different models, and had fairly strong inside-view arguments that malaria hampers productivity. Are there particular things they could have done in that study to make their findings more convincing to you? Or do you think it’s impossible in principle to come to obtain a robust causal inference from a cross-country regression?
And on the other hand, if (big if) Gallup and Sachs are correct, it seems wrong to reject the finding as unlikely to point the way toward transformative growth. A factor of 20 over 40 years is a difference of about 9-10% a year, of which malaria alone would account for more than 1/8. Given that they’re only talking about malaria here, this doesn’t to me seem inconsistent with a story that the “economics of poverty” is the right thing to look at and the other 7/8 is explained by other diseases, education, etc. (Again, under the assumption that the G&S result is true.)
Reblogged this on Richard Cheeseman's blog and commented:
I don’t know the answer to the question posed by this interesting blog post. However, poor, malnourished people are not well equipped to give their all to economic activity, so poverty alleviation seems like a reasonable first step towards macroeconomic growth.
The difference in living standards between South Korea and Tanzania, for example, is certainly not because Tanzanian’s don’t work as hard as South Koreans. Even if there is something to the efficiency wage idea you’re working with, it cannot explain the 20-to-1 ratio of output per worker.
Don’t we have some evidence on education? such as
http://hanushek.stanford.edu/publications/knowledge-capital-nations-education-and-economics-growth (David Weil in recent handbook chapter finds some evidence of causality from health to growth but says magnitude small)
and some suggestive evidence that the micro impact you observe from social protection (increase investments in productive assets) translates at the macro scale (I am maybe stretching this a bit but thinking of that IMF paper by Ostry et al on redistribution and growth).
of course if one gives aid to a representative household in a credit-constrained neoclassical economy far beneath steady state with high returns on capital, they investment some of it but consume most of it. That’s too stylized to put too much weight on, but the basic idea is of course that people like the WB (or the development industry in aggregate) should be doing both. See here: http://www.sciencedirect.com/science/article/pii/S0022199614001263
although authors do not emphasize allocation of aid between growth and investment, it can be gleaned from changes in saving rates
Pingback: Do You Have to Choose Growth or Development? Part Deux | The Growth Economics Blog
How did we get to the impasse in which rich country mainstream development agencies have become increasingly irrelevant to the developing world—so much so that developing countries would rather found and fund their own new organizations than work with existing ones? I argue that this is due to two large shifts.
Firstly, the developing countries are increasingly less reliant on official development assistance (ODA) flows for financing, and hence are increasingly less tolerant of established practice that the lending/granting organizations impose the terms under which development assistance happens. This is primarily the result of development success: through a combination of economic growth, greater macro-economic prudence, and an expanding array of willing lenders and foreign exchange sources (such as resource rents from high commodity prices), many countries have become less dependent on donors.
Secondly, the coalition that supports aid in the West has changed significantly towards a political base that is “post-materialist,” which makes it is less and less supportive of material gains as an important objective of assistance. This has shifted the political center of gravity in discourse about assistance in the West away from the priorities of the developing countries themselves.
Above is from the paper from Prof Pritchett and is spot on.
He, later in the paper, brings the post materialist approach under the spot light by focusing on the sustainable part now dominant in western development thinking. This is applied by me as the western development hegemon saying to the poor world that they shouldn’t me interested so much in materialism so that the environment can be sustained.
He further makes a point about the development agencies of the western hegemon becoming irrelevant to the development of the poor world as they will not be able to adapt to the new focus of the poor world. Even legally binding commitments in the constitutions of some agencies will make them irrelevant.
All in all a tremendous post by a major development thinker not without sad humour including the World Bank building a port in Somali but now using mobile phone technology to monitor poverty. I wonder if they sent then the news of how poor they were by sms.
Collier et al also have much to say about growth but I can’t remember the title and don’t have it to hand.