Showing papers by "William Easterly published in 1999"

Public goods and ethnic divisions

Abstract: The authors present a model that links heterogeneity of preferences across ethnic groups in a city to the amount and type of public good the city supplies. Results show that the shares of spending on productive public goods - education, roads, sewers, and trash pickup _ in U.S. cities (metro areas/urban counties) are inversely related to the city's (metro area's/county's) ethnic fragmentation, even after controlling for other socioeconomic and demographic determinants. They conclude that the ethnic conflict is an important determinant of local public finances. In cities where ethnic groups are polarized, and where politicians have ethnic constituencies, the share of spending that goes to public goods is low. Their results are driven mainly by how white-majority cities react to varying minority-groups sizes. Voters choose lower public goods when a significant fraction of tax revenues collected from one ethnic group is used to provide public goods shared with other ethnic groups.

the middle class consensus and economic development

Abstract: A middle class consensus is defined as a high share of income for the middle class and a low degree of ethnic divisons. The paper links a middle class consensus to resource endowments, along the lines of the provocative thesis of Engerman and Sokoloff (1997 and 2000). This paper exploits this association using tropical resource endowments as instruments for inequality. A higher share of income for the middle class and lower ethnic divisions are associated with higher income and higher growth, as well as with more education, better health, better infrastructure, better economic policies, less political instability, less civil war and ethnic minorities at risk, more social “modernization” and more democracy.

Life During Growth

Abstract: A remarkable diversity of indicators shows quality of life across nations to be positively associated with per capita income. At the same time, the changes in quality of life as income grows are surprisingly uneven. Either in levels or changes, moreover, the effect of exogenous shifts over time is surprisingly strong compared to growth effects. This article reaches this conclusion with a panel dataset of 81 indicators covering up to four time periods (1960, 1970, 1980, and 1990). The indicators cover seven subjects: (1) individual rights and democracy, (2) political instability and war, (3) education, (4) health, (5) transport and communications, (6) inequality across class and gender, and (7) “bads.” With a SUR estimator in levels, income per capita has an impact on the quality of life that is significant, positive, and more important than exogenous shifts for 32 out of 81 indicators. With a fixed-effects estimator, growth has an impact on the quality of life that is significant, positive, and more important than exogenous shifts for 10 out of 81 indicators. With a first-differences IV estimator, growth has a causal impact on the quality of life that is significant, positive, and more important than exogenous shifts for six out of 69 quality of life indicators. The conclusion speculates about such explanations for the pattern of results as (1) the long and variable lags that may come between growth and changes in the quality of life and (2) the possibility that global socioeconomic progress is more important that home-country growth for many quality-of-life indicators.

Can institutions resolve ethnic conflict

Abstract: High-quality institutions -- reflected in such factors as rule of law, bureaucratic quality, freedom from government expropriation, and freedom from government repudiation of contracts -- mitigate the adverse economic effects of ethnic fractionalization identified by Easterly and Levine (1997) and others. Ethnic diversity has a more adverse effect on economic policy and growth when a government's institutions are poor. But poor institutions have an even more adverse effect on growth and policy when ethnic diversity is high. In countries where the institutions are good enough, however, ethnic diversity does not lessen growth or worsen economic policies. Good institutions also reduce the risk of wars and genocides that might otherwise result from ethnic fractionalization. However, these forms of violence are not the channel through which ethnic fragmentation and its interaction with institutions affect economic growth. Ethnically diverse nations that want to endure in peace and prosperity must build good institutions.

The Search for the Key: Aid, Investment, and Policies in Africa

Abstract: Aid does not necessarily finance investment, and investment does not necessarily promote growth. But the combination of private investment, good policies, and foreign aid is quite powerful. When societies themselves take the lead in putting growth-enhancing policies in place, foreign aid can play a powerful supporting role, bringing ideas, technical assistance, and money. Dollar and Easterly's study of aid, investment, and policies in Africa leads them to four principal conclusions: ° The traditional links between aid, investment, and growth are not robust. Aid does not necessarily finance investment and investment does not necessarily promote growth. ° Differences in economic policies can explain much of the difference in growth performance. Poor quality of public services, closed trade regimes, financial repression, and macroeconomic mismanagement explain Africa's poor record. ° Foreign aid cannot easily promote lasting policy reform in countries where there is no strong domestic movement in that direction. Country ownership of reform is more important than donor conditionality. ° These three conclusions imply that societies themselves must take the lead in putting growth-enhancing policies in place. When this happens, foreign aid can play a powerful supporting role, bringing ideas, technical assistance, and money. The combination of private investment, good policies, and foreign aid is quite powerful. Where do we stand in the search for the key to growth in Africa? Because past keys to growth in Africa have failed, Dollar and Easterly are cautious about claims to a new key. But even if aid-cum-private-investment-cum-policy reform falls short of being the one and only key to growth, disbursing aid into good policy environments would be an improvement on current practices. This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to examine aid effectiveness. The authors may be contacted at ddollar@worldbank.org or weasterly@worldbank.org.

When is Fiscal Adjustment an Illusion

Abstract: A simple model shows that when an outside agent forces a reduction in a government's conventional deficit (debt accumulation), the government will respond by lowering its asset accumulation or by increasing hidden liabilities. That leaves net worth unchanged, so fiscal adjustment is an illusion. Fiscal adjustment is an illusion when it lowers the budget deficit or public debt but leaves the government's net worth unchanged, says Easterly. Conventional measures of the budget deficit largely measure the change in explicit public sector liabilities (debt). A more appropriate measure of the deficit would be the change in public sector net worth, but many criticize this concept as impossible to measure. Easterly takes a positive, rather than normative, approach to the net worth definition of fiscal balance. A simple model shows that when an outside agent forces a reduction in a government's conventional deficit (debt accumulation), the government will respond by lowering its asset accumulation or by increasing hidden liabilities. That leaves net worth unchanged, so fiscal adjustment is an illusion. He performs some simple empirical tests on the observational predictions of the model, examining a sample of countries with World Bank and International Monetary Fund adjustment programs and case studies of Maastricht Euro countries. The results confirm the model predictions: Fiscal adjustment in these countries was at least partly an illusion. This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to study the political economy of policymaking. The author may be contacted at weasterly@worldbank.org.

The search for the key : aid, investment, and policies in Africa

Abstract: The traditional aid-to-investment-to-growth linkages are not very robust, especially for African economies. Aid does not necessarily finance investment and investment does not necessarily promote growth. Differences in economic policy, on the other hand, can explain much of the difference in growth performances. Furthermore, domestic politics rather than aid or conditionality has been the main determinant of policy reform. Where societies and governments have succeeded in putting growth-enhancing policies into place, aid has provided useful support. The combination of good policies and aid has created a productive environment for private investment and growth. Copyright 1999 by Oxford University Press.

The ghost of financing gap : how the Harrod-Domar growth model still haunts development economics

Abstract: The ghost of a long-dead growth model still haunts aid to developing countries. The Harrod-Domar growth model supposedly died long ago. But for more than 40 years, economists working on developing countries have applied- still apply- Harrod-Domar model to calculate short-run investment requirements for a target growth rate. They then calculate a financing gap between the required investment and available resources and often fill the "financing gap" with foreign aid. Easterly traces the intellectual history of how a long-dead model came to influence today's aid allocation to developing countries. He asks whether the model's surprising afterlife is attributable to consistency with the 40 years of data that have accumulated during its use. The answer is "no." This paper-a product of the Development Research Group-is part of a larger effort in the group to study the determinants of economic growth.

When is fiscal adjustment an illusion

Abstract: Fiscal adjustment is an illusion when it lowers the budget deficit or public debt but leaves government net worth unchanged. Conventional measures of the budget deficit largely show the change in public sector debt. Ideally, the measured deficit would reflect the change in Public sector net worth. Many people consider it impractical to try to measure public sector assets. My paper does not discuss what the deficit should measure, but instead proposes a positive and testable theory of how governments actually behave. When an outside agent forces a reduction in a government's conventional deficit and debt accumulation, the government responds by lowering asset accumulation or increasing hidden liabilities. Since government net worth is unchanged, such fiscal adjustment is an illusion. Using data from countries with World Bank and IMF fiscal adjustment programmes, and case studies of EMU countries' compliance with the Maastricht criteria, I confirm my theoretical predictions: fiscal adjustment in these countries was at least partly an illusion.

Inflation and the Poor

Abstract: Using polling data for 31,869 households in 38 countries, and allowing for country effects, the authors show that the poor are more likely than the rich to mention inflation as a top national concern. This result survives several robustness checks. Also, direct measures of improvements in well-being for the poor - the change in their share of national income, the percentage decline in poverty, and the percentage change in the real minimum wage - are negatively correlated with inflation in pooled cross-country samples. High inflation tends to lower the share of the bottom quintile and the real minimum wage - and tends to increase poverty.

The Effect of International Monetary Fund and World Bank Programs on Poverty

Abstract: Structural adjustment - as measured by the number of adjustment loans from the IMF, and the World Bank - reduces the growth elasticity of poverty reduction. The author finds no evidence for structural adjustment having a direct effect on growth. The poor benefit less from output expansion in countries with many adjustment loans, than they do in countries with few such loans. By the same token, the poor suffer less from an output contraction in countries with many adjustment loans, than in countries with few. Why would this be? One hypothesis is that adjustment lending is counter-cyclical, in ways that smooth consumption for the poor. There is evidence that some policy variables under adjustment lending are counter-cyclical, but no evidence that the cyclical component of those policy variables affects poverty. The author speculates that the poor may be ill placed to take advantage of new opportunities, created by structural adjustment reforms, just as they may suffer less from the loss of old opportunities in sectors that were artificially protected before reform. Poverty's lower sensitivity to growth under adjustment lending, is bad news when an economy expands, and good news when it contracts. These results could be interpreted as giving support to either the critics, or the supporters of structural adjustment programs.

Growth implosions, debt explosions, and my Aunt Marilyn : do growth slowdowns cause public debt crises?

Abstract: The worldwide slowdown in growth after 1975 was a major negative fiscal shock. Slower growth lowers the present value of tax revenues and primary surpluses and thus makes a given level of debt more burdensome. Most countries failed to adjust to the negative fiscal consequences of the growth implosion, so public-debt-to-GDP ratios exploded. The growth slowdown therefore played an important role in the debt crisis of the middle-income countries in the 1980s, the crisis of the heavily indebted poor countries (HIPCs) in the 1980s and 1990s, and the increased public debt burden of the industrial countries in the 1980s and 1990s. Moreover, the HIPCs' debt problems were worse than elsewhere because, as a result of poor policies, these countries grew more slowly after 1975 than other low-income countries. Econometric tests and fiscal solvency accounting confirm the important role of growth in debt crises.

Life during Growth: International Evidence on Quality of Life and Per Capita Income

Abstract: Changes in a home country's quality-of-life indicators possibly depend as much on changes in world income as on changes in home country growth. The evidence that life gets better during growth is surprisingly uneven. The cross-country relationship between income and diverse indicators of the quality of life remains strong. Remarkably diverse indicators show quality of life across nations to be positively associated with per capita income. But changes in quality of life as income grows are surprisingly uneven. Moreover, in either level or changes, the effect of exogenous shifts over time is surprisingly strong. It is possible that changes in a home country's quality-of-life indicators depend as much on changes in world income as on changes in home country growth. The improvement in life expectancy everywhere, for example, may have reflected technical breakthroughs in antibiotics associated with world economic growth. The strong results on exogenous time shifts point in this direction. Easterly reaches this conclusion using a panel data set of 81 indicators covering up to four periods (1960, 1970, 1980, and 1990). The indicators cover seven subjects: health, education, individual rights and democracy, political instability and war, transport and communications, inequality across class and gender, and bads. With a seemingly unrelated regressions (SUR) estimator in levels, per capita income has an impact on the quality of life that is significant, positive, and more important than exogenous shifts for 32 of 81 indicators. With a fixed effects estimator, growth has an impact on the quality of life that is significant, positive, and more important than exogenous shifts for 6 of 69 quality-of-life indicators. The evidence that life gets better during growth is surprisingly uneven. The cross-country relationship between income and diverse indicators of the quality of life remains strong. Easterly speculates about explanations for the pattern of results, such as the long and variable lags that may come between growth and changes in the quality of life, and the possibility that global socioeconomic progress is more important than home country growth for many quality-of-life indicators. This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to study the political economy determinants of policymaking. The author may be contacted at weasterly@worldbank.org.

How Did Highly Indebted Poor Countries Become Highly Indebted?Reviewing Two Decades of Debt Relief

Abstract: Theoretical models predict that countries with unchanged long-run savings preferences will respond to debt relief by running up new debts or by running down assets. And there are some signs that incremental debt relief over the past two decades has fulfilled those predictions. Debt relief is futile for countries with unchanged long-run savings preferences. How did highly indebted poor countries become highly indebted after two decades of debt relief efforts? A set of theoretical models predict that countries with unchanged long-run savings preferences will respond to debt relief with a mixture of asset decumulation and new borrowing. A model also predicts that a high-discount-rate government will choose poor policies and impose its intertemporal preferences on the entire economy. Reviewing the experience of highly indebted poor countries, compared with that of other developing countries, Easterly finds direct and indirect evidence of asset decumulation and new borrowing associated with debt relief. The ratio of the net present value of debt to exports rose strongly over 1979-97 despite the debt relief efforts. Average policies in highly indebted poor countries were generally worse than those in other developing countries, controlling for income. The trend for terms of trade was no different in highly indebted poor countries than in other developing countries, not were wars more likely in highly indebted poor countries. Over time there has been an important shift in financing for highly indebted poor countries, away from private and bilateral nonconcessional sources to the International Development Association and other sources of multilateral concessional financing. But this implicit form of debt relief also failed to reduce debt in net present value terms. Although debt relief is done in the name of the poor, the poor are worse off if debt relief creates incentives to delay reforms needed for growth. This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to study the effectiveness of aid for growth. The author may be contacted at weasterly@worldbank.org.

Life during growth: international evidence on quality of life and per capita income

Abstract: Remarkably diverse indicators show quality of life across nations to be positively associated with per capita income. But changes in quality of life as income grows are surprisingly uneven. Moreover, in either level or changes, the effect of exogenous shifts over time is surprisingly strong. It is possible that changes in a home country's quality-of-life indicators depend as much on changes in world income as on changes in home country growth. The improvement in life expectancy everywhere, for example, may have reflected technical breakthroughs in antibiotics associated with world economic growth. The strong results on exogenous time shifts point in this direction. The author reaches this conclusion using a panel data set of 81 indicators covering up to four periods (1960, 1970, 1980, and 1990). The indicators cover seven subjects: health, education, individual rights and democracy, political instability and war, transport and communications, inequality across class and gender, and"bads."With a seemingly unrelated regressions (SUR) estimator in levels, per capita income has an impact on the quality of life that is significant, positive, and more important than exogenous shifts for 32 of 81 indicators. With a fixed effects estimator, growth has an impact on the quality of life that is significant, positive, and more important than exogenous shifts for 6 of 69 quality-of-life indicators. The evidence that life gets better during growth is surprisingly uneven. The cross-country relationship between income and diverse indicators of the quality of life remains strong. The author speculates about explanations for the pattern of results, such as the long and variable lags that may come between growth and changes in the quality of life, and the possibility that global socioeconomic progress is more important than home country growth for many quality-of-life indicators.

Africa's growth tragedy : a retrospective, 1960-89

Abstract: Africa's economic history since 1960 fits the classical definition of tragedy: potential unfulfilled with disastrous consequences. The authors use one mehthodology - cross-country regressions - to account for sub-Saharan Africa's growth performance over the past 30 years and to suggest policies to promote growth over the next 30 years. They statistically quantify the relationship between long-run growth and a wider array of factors than any previous study. They consider such standard variables as initial income to capture convergence effects, schooling, political stability and indicators of monetary, fiscal, trade, exchange rate, and financial sector policies. They also consider such new measures as infrastructure development, cultural diversity, and economic spillovers from neighbors' growth. Their analysis: 1) improves substantially on past attempts to account for the growth experience of sub-Saharan African countries; 2) shows that low school attainment, political instability, poorly developed financial systems, large black-market exchange-rate premia, large government deficits, and inadequate infrastructure are associated with slow growth; 3) finds that Africa's ethnic diversity tends to slow growth and reduce the likelihood of adopting good policies; 4) identifies spillovers of growth performance between neighboring countries. The spillover effects of growth have implications for policy strategy. Improving policies alone boosts growth substantially, but if neighboring countries act together, the effects on growth are much greater. Specifically, the results suggest that the effects of neighbor's adopting a policy change is 2.2 times greater than if a single country acted alone.

Public Goods and Ethnic Divisions

Abstract: The authors present a model that links heterogeneity of preferences across ethnic groups in a city to the amount and type of public good the city supplies. Results show that the shares of spending on productive public goods - education, roads, sewers, and trash pickup _ in U.S. cities (metro areas/urban counties) are inversely related to the city's (metro area's/county's) ethnic fragmentation, even after controlling for other socioeconomic and demographic determinants. They conclude that the ethnic conflict is an important determinant of local public finances. In cities where ethnic groups are polarized, and where politicians have ethnic constituencies, the share of spending that goes to public goods is low. Their results are driven mainly by how white-majority cities react to varying minority-groups sizes. Voters choose lower public goods when a significant fraction of tax revenues collected from one ethnic group is used to provide public goods shared with other ethnic groups.

How did highly indebted poor countries become highly indebted?: reviewing two decades of debt relief

Abstract: How did highly indebted poor countries become highly indebted after two decades of debt relief efforts? A set of theoretical models predict that countries with unchanged long-run savings preferences will respond to debt relief with a mixture of asset decumulation and new borrowing. A model also predicts that a high-discount-rate government will choose poor policies and impose its inter-temporal preferences on the entire economy. Reviewing the experience of highly indebted poor countries, compared with that of other developing countries, the author finds direct and indirect evidence of asset decumulation and new borrowing associated with debt relief. The ratio of the net present value of debt to exports rose strongly over 1979-97 despite the debt relief efforts. Average policies in highly indebted poor countries were generally worse than those in other developing countries, nor were wars more likely in highly indebted poor countries. Over time there has been an important shift in financing for highly indebted poor countries, away from private and bilateral nonconcessional sources to the International Development Association and other sources of multilateral concessional financing. But this implicit form of debt relief also failed to reduce debt in net present value terms. Although debt relief is done in the name of the poor, the poor are worse off if debt relief creates incentives to delay reforms needed for growth.

The search for the key: aid, investment, and policies in Africa

Abstract: The authors'study of aid, investment, and policies in Africa leads them to four principal conclusions: 1) The traditional links between aid, investment, and growth are not robust. Aid does not necessarily finance investment and investment does not necessarily promote growth. 2) Differences in economic policies can explain much of the difference in growth performance. Poor quality of public services, closed trade regimes, financial repression, and macroeconomic mismanagement explain Africa's poor record. 3) Foreign aid cannot easily promote lasting policy reform in countries where there is no strong domestic movement in that direction. Country ownership of reform is more important than donor conditionally. 4) These three conclusions imply that societies themselves must take the lead in putting growth-enhancing policies in place. When this happens, foreign aid can play a powerful supporting role, bringing ideas, technical assistance, and money. The combination of private investment, good policies, and foreign aid is quite powerful. Where do we stand in the search for the key to growth in Africa? Because past"keys"to growth in Africa have failed, the authors are cautious about claims to a new key. But even if aid-cum-private-investment-cum-policy reform falls short of being the one and only key to growth, disbursing aid into good policy environments would be an improvement on current practices.