Thursday, May 29, 2008

Easterly on The Growth Report

Easterly loathes planners. This time he blasts Michael Sepence and his team their their two year long research on finding the sources of growth. He argues that the outcome of $4m investment on Commission on Growth and Development is an inconclusive big report; their answer to high growth, as Easterly reads the report, is: "we do not know, but trust experts to figure it out."

[...]This conclusion is fleshed out with statements such as: “It is hard to know how the economy will respond to a policy, and the right answer in the present moment may not apply in the future.” Growth should be directed by markets, except when it should be directed by governments.

My students at New York University would have been happy to supply statements like these to the World Bank for a lot less than $4m.

[...]The Growth Commission correctly pointed out that such an attempt to find secrets to growth has failed. The Growth Commission concluded that “answers” had to be country specific and even period specific. But if each moment in each country is unique, then experts cannot learn from any other experience – so on what basis do they become an “expert”?

[...]The commission made the common mistake of anointing high growth rates as the measure of success, whereas high growth mysteriously comes and goes. Indeed, only two of the 13 high-growth episodes the commission studied were still going at the time of the study. Yesterday’s growth failures (for example India) are today’s successes and yesterday’s growth successes (for example Brazil) are today’s failures. Much of this volatility is inexplicable and unpredictable. To give credit to whatever leader happens to be in power during a burst of high growth is just circular reasoning (How do we know they were a great leader? Because there was high growth!).

As always Easterly blasts the WB and similar 'development expert' models. He argues that growth is accidental and unpredictable by bringing in Hayekian perspectives of serchers and spontaneous order.

What to do in a world of such unpredictability? There are some general principles and they do not require experts. Another Nobel laureate gave the crucial insight a long time ago – the answer is freedom for multitudinous individuals to figure out their own answers. Friedrich Hayek said: “Liberty is essential to leave room for the unforeseeable and unpredictable; we want it because we have learned to expect from it the opportunity of realising many of our aims. It is because every individual knows so little and ... because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.”

The evidence for this vision is not found in those baffling fluctuations of growth rates, it is in the levels of development attained in the long run. Confirming Hayek, systems that give more liberty to individuals – featuring both more economic and political freedoms – are associated with much less poverty. The evidence for this comes from both history (for example old, despotic, poor Europe compared with modern, free, rich Europe) and cross-country comparisons (for example South Korea compared with North Korea, former West Germany compared with East, New Zealand compared with Zimbabwe). This alternative paradigm has a much smaller role for experts, because experts cannot direct or impose freedom from the top down (or else it would not be freedom).

I do not totally agree with Easterly and think that industrial policy and highly specific government intervention can work to rectify market failures. More here and here. More on the Growth Report here and here.