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The Lost Decades: Developing Countries’ Stagnation in Spite of Policy Reform 1980-1998

The Lost Decades: Developing Countries’ Stagnation in Spite of Policy Reform 1980-1998. William Easterly Journal of Economic Growth , Volume 6, Issue 2, June 2001, 135-157 . http://www.nyu.edu/fas/institute/dri/Easterly/File/the%20lost%20decades.pdf. Abstract.

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The Lost Decades: Developing Countries’ Stagnation in Spite of Policy Reform 1980-1998

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  1. The Lost Decades:Developing Countries’ Stagnation in Spite of Policy Reform 1980-1998 William Easterly Journal of Economic Growth, Volume 6, Issue 2, June 2001, 135-157 http://www.nyu.edu/fas/institute/dri/Easterly/File/the%20lost%20decades.pdf

  2. Abstract • [...] In 1980-98, median per capita income growth in developing countries was 0.0 percent, as compared to 2.5 percent in 1960-79. • Yet […] variables that are standard in growth regressions -- policies like financial depth and real overvaluation, and initial conditions like health, education, fertility, and infrastructure generally improved from 1960-79 to 1980-98. • Developing country growth should have increased instead of decreased according to the standard growth regression determinants of growth.

  3. Abstract • [W]orldwide factors like the increase in world interest rates, the increased debt burden of developing countries, the growth slowdown in the industrial world, and skill-biased technical change may have contributed to the developing countries' stagnation, • [but the paper lacks decisive evidence].

  4. Abstract • [M]any growth regressions are mis-specified • The Jones (1995) critique that a stationary variable (growth) is being regressed on non-stationary variables like policies and initial conditions. • It may be that the 1960-79 period was the unusual period for LDC growth, and the 1980-98 stagnation of poor countries represents a return to the historical pattern of divergence between rich and poor countries.

  5. Paper • Around 1980, countries adopted market-friendly policies. • Not only policies, but attainment in education, life expectancy, infrastructure, and fertility (which should affect growth) advanced. • But even though policies converged, developing countries’ and developed countries’ output diverged.

  6. In general, the financial sector became deeper … and less repressed. That is, credit became easier to get and was less inefficiently allocated.

  7. Developing country currencies were overvalued before the 80’s. The real devaluation should have made countries more competitive and helped exports.

  8. People who lived longer and were more educated should have produced more and more quality goods. Communication costs fell, reducing marginal costs of production. Women could work more and had fewer mouths to feed.

  9. Government budgets improved over 1980-1999. The extra saving should have helped growth.

  10. geometric mean = exp(mean(log(Pt/Pt-1))) – 1 The distribution of black market premium and inflation are skewed to the right.

  11. Inequality improved over 1980-1999. The more a country depends on commodities, the more (it is thought) rent-seeking there will be and the fewer linkages and externalities for other industries.

  12. Conclusion • Poor policies are not a plausible candidate for explaining the lost decades. Policies either got better or remained the same throughout the period 1960-1998.

  13. References • Barro, Robert J. (1998). Determinants of Economic Growth: A Cross Country Empirical Study. Cambridge, MA: MIT Press. • Barro, Robert J. and Xavier Sala-i-Martin. (1995). Economic Growth. New York: McGraw-Hill. • Bruno M. and W. Easterly. (1998). “Inflation Crises and Long-run Growth,” Journal of Monetary Economics 4, 3-26. • Canning, David, and Marianne Fay. (1993). “The Effect of Transportation Networks on Economic Growth,” Discussion Paper Series, Columbia University, Dept. of Economics. • Easterly, William and Ross Levine. (1997a). “Africa’s Growth Tragedy: Policies and Ethnic Divisions,” Quarterly Journal of Economics November. • Easterly William and Sergio Rebelo. (1993). "Fiscal Policy and Economic Growth: an Empirical Investigation," Journal of Monetary Economics 32, December, 417-458.

  14. References • Easterly William and Sergio Rebelo. (1993). "Fiscal Policy and Economic Growth: an Empirical Investigation," Journal of Monetary Economics 32, December, 417-458. • Fischer, Stanley. “The Role of Macroeconomic Factors in Growth,” Journal of Monetary Economics, XXXII (1993), 485-511. • King, Robert G. and Ross Levine. (1993a). “Finance and Growth: Schumpeter Might be Right,” Quarterly Journal Of Economics, 108, 717-737. • King, Robert G. and Ross Levine. (1993b). “Finance, Entrepreneurship, and Growth: Theory and Evidence,” Journal Of Monetary Economics, 32, 513-542. • Knack, Stephen and Philip Keefer. (1995). “Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures,” Economics and Politics, 7, 3, 207- 227. • Levine, Ross, and David Renelt. (1991). “Sensitivity Analysis of Cross-Country Growth Regressions,” American Economic Review, XXC, 942-963. 26

  15. De-velop_Mented • "IMF advertises loans on late night TV, "bad credit no problem"" • "UN campaign to reduce poverty headcount urges poor to refrain from sex" • "Malawian mother adopts Britney Spears" • "African leaders announce debt relief plan forgiving up to two thirds of G8's unkept promises, with 10 year grace period" • "UN Millennium Project announces that Madonna's Malawian baby has attained Millennium Development Goals" http://www.nyu.edu/fas/institute/dri/Easterly/De-velop-mented.htm

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