Easterly on development

William Easterly has two new accessible articles. One in the American Economic Review, on institutions and economic development, and another one on what should a perfect aid agency be, in the refreshing Journal of Economic Perspectives. I have to admit I really enjoy reading the latter journal. As its website mention, it “attempts to fill a gap between the general interest press and most other academic economics journals”. It does this by offering “readers an accessible source for state-of-the-art economic thinking” that is easy to read.

Anyway, back to development. Institutions, as many instrumental variables have proved, cause growth and development. In other words, fix your institutions and you’ll grow. But how do you impose good institutions? Bottom-up or from the top-down? This is what Easterly tries to address (not answer, of course) in his AER paper. He concludes, as expected, that no clear answer exists. The imposition of a new set of laws by top-down shock therapy? Think of Russia and forget about it. It can indeed have nasty, destructive effects. So what about a bottom-up process, such as giving subsistence farmers land titles, as suggested by De Soto? Well, as Easterly explains, it didn’t really work in Africa, and that’s because these are of no use when there’s no rule of law. So doesn’t this mean we should start with imposing the rule of law, from the top? Oh no, I forgot, that doesn’t work.

In his other paper he complains about the poor quality data on foreign aid and about the fact that so much money goes to corrupt countries. He also complain that “aid tying, the use of food aid-in-kind, and the heavy use of technical assistance persist in many aid agencies, despite decades of complaints about these channels being ineffective”. As for which are the best agencies, he writes that “development banks tend to be closest to best practices for aid, the UN agencies perform worst along each dimension, and the bilaterals are spread out all along in between”. To me, the UN development agencies do look incompetent. He explains why by writing mockingly: "UN announces new agency to combat excessive bureaucracy in foreign aid"