Arnold Kling  

Foreign Aid and Growth

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In a generally skeptical post on the topic of using foreign aid to stimulate economic growth, Tyler Cowen asks,


If you know of any good studies on what predicts future (not current) growth, in the Granger-causal sense, please let me know.

In my predecessor blog, I pointed to a paper by Richard Roll and John Talbott, who used an event study methodology to show that a democratic change increased economic growth.

For Discussion. Do economists have a reliable recipe for increasing growth in underdeveloped economies?


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COMMENTS (15 to date)
Lawrance George Lux writes:

Arnold,
I could not get to the Roll and Tallbatt article. Cowen fails to mention the Millenium Account was to allow the World Corporate structure to dispense the foreign aid. This is not necessarily bad, but Funds will be used to extort Trade advantage.

Do Economists have good criterea for determining growth patterns? About as good as the old Soviet bureacracy State planning. I remember the Friedman model in South America, still acclaimed as a success, though Pension plans, level of GDP, and standard of living have yet to recover. lgl

Steve writes:

How about we force them to focus on their domestic economies rather than relying on taking growth from us via the export driven economies they have become accustomed to?

Dave Sheridan writes:

Here is a link to the Roll/Talbott November 2001 paper, and if there is another one I think this is the latest version.
http://www.cipe.org/pdf/whatsnew/events/talbot.pdf

This may be a matter of faith rather than empiricism (I'm a Hernando De Soto fan, and Roll and Talbott cite him favorably,) but I think the recipe exists. The problem is implementation.
a) Moving toward a society where the reliable precursors (and simultaneous indicators) exist requires overturning entrenched interests.
b) Several advances need to be occurring somewhat simultaneously. Political liberalization by itself doesn't promise results. The evolution of respect for contracts, property rights, creation of infrastructure, all are important.

This is a huge topic, suitable for a number of discussions here.

Lawrance George Lux writes:

Dave,
Here is how I see the Roll/Talbott article. Remember people have a tendency to laugh at my Math capacities.

Their missing variable is undoubtedly the education of Consumers, which leads to a sophification of purchasing.

They used a Legendre polynomial with a factor range of -1 to +1. It would lead to extremes of maxima and minima. Such actual values would be the plus/minus the absolute value of the square root of values attained. Like I said, I could be wrong; very poor Math education.

De Soto (2000) estimate of informal sector of $9.3 trillion is too low with inclusion of Government Corruption, too high without it.

Their use of Hall and Jones (1999) is simply carrying on an assumption made by the previous Authors. Sub-suming Democratic organizations is the most potent form of implimenting dictatorship, while Democracies are notorious for their own economic debacles.

Roll/Talbott miss the real generative cause of Inflation.

I think it is a well-thought Study, though, whose real shortcoming lies only in the multiplicity of functional variables; which no one can do anything about. The Study does provide an excellent framework for future research, both as Question-Poser, and as Test model. lgl

David Thomson writes:

Focussing primarily on foreign aid is stupid. At best, it ranks no more than third place behind establishing a stable political order and a capitalist economy. If you truly desire to assist the citizens of the Third World---then immediately petition your political officials to enact free trade policies. Sending the poor a few charity dollars might make you feel good---but it’s mostly wasting everybody’s time.

Anonymous writes:

David, that's quite a list of book reviews you have there. I was disappointed though not to see the Ted Kaczynski's famous manifesto in your review list. Have you read it?

Gautam writes:

Bravo! David. I agree with you totally.

David Thomson writes:

Dear Gautam,

I’m glad that we agree on foreign aid. What about Mahatma Ghandi? I’m convinced that this very famous man caused far more harm than good. The British were eventually going to give the people of India their freedom anyway. The accelerated process only resulted in the deaths of thousands, if not millions. Also, Ghandi was a reactionary luddite. He opposed capitalism and progress itself. Am I exaggerating, or is Ghandi grossly overrated?

Cheers,

David Thomson
Houston, Texas

Monte writes:

“Do economists have a reliable recipe for increasing growth in underdeveloped economies?”

To the extent any recipe includes some form of economic liberalization, yes. However, most economists seeking to improve the economic well-being of underdeveloped countries frequently endorse policies that effectively restrict market forces with the hope of reducing unemployment and/or idle capacity in the short run. Planometrics, it seems, is the economist’s irresistible Song of the Sirens.

Economic growth in developing countries is precipitated by freedom and, in advanced countries, is sustained by it (Click here to check out Heritage Foundation’s Index of Economic Freedom reference guide).

Gautam writes:

Happy New Year Everyone!

David,

Indians are divided in their understanding of Gandhi, some see him as a Saint, while other see him as the root cause of the Partition. His Luddite attitudes were and are not very consequential in most Indian discussions because the polity is more concerned today with rent-seeking than with issues arising from the impact of Machinery.

Though his ideas about Swadeshi(Emphasis on self-reliance in production) have been picked up ironically by his political detractors. I think Swadeshi was just a tool of realpolitick when first used that helped create an Indian identity, which was distinctly missing when Gandhi started out on his mission.

Personally, I think Gandhi was and is today, given far too much importance, because of Congress' Spin. He was the soul of the Independence movement, but its hands and legs were other people like Nehru, Jinnah, Vallabhai Patel and numerous others.

For the people of India at large issues of economics were preceded by issues of Human Rights. The caste system was then and remains today a great limitation on economic and social mobility. Gandhi addressed his efforts to the emancipation of the lower castes as much as he did to the independence of the country.

As far as the partition goes, it is important to understand that it was a division of British India, a political entity created by the East India company and later the British Government, with little historical precedence. Also, the British had cultivated socio-religious segregations through their employment and election policies.

Though the British created "India", it was Gandhi and the Independence Movement that created the "Indian", and this was acheived by emphasising self-relaince, which could not at the time be gained through technology, which was seen as an advantage of the colonising West. So the strategy was to promote, indigenous and low-tech means of production, a sound political strategy at the time, though far from economically sound.

I am hesistant to say that Gandhi was really a bad thing for India (Economically), because after his death and Nehru's ascendance to Prime Ministership, everyone of consequence just forgot about him and his ideas. Mahalanobis'(A Statistician turned Economist) Economic growth model, was accepted during the 2nd five year plan(about 1960), which followed the principles of Central Planning and Government Control, these have done far more harm to the Indian economy than Gandhi.

I haven't expressed my opinion on everything you asked, but I hope we can continue this discussion.

gautam

David Thomson writes:

“For the people of India at large issues of economics were preceded by issues of Human Rights. The caste system was then and remains today a great limitation on economic and social mobility. Gandhi addressed his efforts to the emancipation of the lower castes as much as he did to the independence of the country.”

That is indeed something I should not underestimate. Should I take it for granted that you have read Dinesh D’Souza’s “What’s So Great About America?” Many Third World citizens are embittered by colonialism. They regrettably focus on the bad aspects---and conveniently overlook the good. There is also something else they should understand: most of us white guys were also once upon a time colonized! My German ancestors centuries ago got their rear ends kicked by the Roman legions. If this had not occurred, I might today be eating raw meat and residing in a cave. The same almost certainly holds true for yourself. There is a very chance that India in the relatively near future could become the center of Western Civilization.

Gautam writes:

Well David, I don't dispute you, infact my full name is Gautam Gustav Bastian, and according to some accounts, some of those Germans or Romans could have been my ancestors too.

The selective acceptance of good aspects or bad aspects is something that helps people consolidate the image of their ideology in their minds. For instance for Libertarians, government can do nothing but bad things, for a Xenophobe, all other peoples and nations but his are barbarians. Similarly a side effect of the Nationalisms that fought colonialism has been a bitter though distant hatred of the colonisers. English the language that I am writing in would have been a foriegn one had it not been for the 200 year British Raj, the Political Unity even of the truncated India is a parting gift of British merchant-robber-conquistadors of the 18th and 19th centuries, like Robert Clive and Lord Dalhousie.

Getting Indians at large to understand this is a noble ideal but one that no politician will commit to. Politicians need to create constituencies through adversarial definition. In India thes constituencies are earmarked along lines of Religion, Caste and Language.

As a matter of an anecdote, I tried this line of argument out with a particularly Hindu Chauvanistic classmate, I told her "The Partition was of British India and not of any other India that existed before it", Her response was an odd glare of denial, which turned into one of general dismay when i told her that I was a Christian in addition to being an Indian. People, even educated people do not want to know the truth, which i find strange though not surprising.

No I have not read the book or the author you refer to.

David Thomson writes:

Dinesh D'Souza was born in India. He is now an citizen of the United States and wrote -What's So Great About America.- I'm sure that you will enjoy reading the chapter entitled: "Two Cheers For Colonialism--How the West Prevailed."

Natarajan Ramachandran writes:

1. I am a little curious to know why, despite Hayek's classic rebuttal to the ideas of central planning, India (Nehru and his cohorts) went ahead with centralized planning. Does anyone have any leads on this?

2. What was MK Gandhi's views on individual liberty? Does anyone of you know of any books/writings/speeches of this good ol' man?

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