New steps needed to spur third-world growth

Over the past two decades of rapid globalization, economic progress in poor nations has notably slowed. So has social progress by some measures, such as life expectancy, infant and child mortality, and education and literacy.

"The typical poor nation has not seen a rise in living standards over the last 20 years, says William Easterly, a senior economic advisor at the World Bank in Washington. "The rich nations have kept getting richer while the poorest nations have stagnated."

Today 14 percent of the world's 6 billion people live in rich industrial nations and enjoy half of the world's total income. The remaining 86 percent - those in the third world - get the other half.

Why these bad trends?

"Poor nations were stuck with bad governments and didn't implement reforms in a way which would bring prosperity," explains Mr. Easterly in part.

For more than 50 years, economists have sought to discover the means by which poor countries in the tropics could become rich like the wealthy nations of North America and Europe. Considerable progress was made for many years.

But various elixirs of growth seem to have lost some potency.

"The precious objects we offered ranged from foreign aid to investment in machines, from fostering education to controlling population growth, from giving loans conditional on reforms to giving debt relief conditional on loans," notes Easterly in a new book, "The Elusive Quest for Growth; Economists' Adventures in the Tropics" (MIT Press). "None has delivered as promised."

A study by the Center for Economic and Policy Research, a Washington think tank, confirms this view. The poorest nations, those with annual incomes per capita of $375 to $1,121, have seen the growth in their economies fall from 1.9 percent annually in the 1960 to 1980 period, to an annual decline of 0.5 percent a year in the 1980-2000 period.

Those nations with incomes ranging from $1,121 to $1,826 in today's dollars saw growth fall from an annual average of 2.1 percent to 0.8 percent. These countries include Egypt, the Philippines, South Korea, Kenya, China, and Zimbabwe.

Developing countries with higher income levels also performed more poorly in the last two decades. Even the industrial countries saw a growth slowdown, though much less pronounced.

Education is generally regarded as a key salvation for the poor.

President Bush proposed two weeks ago that development banks convert half of their lending to the poorest countries to grants focused on education, healthcare, access to clean water, and sanitation.

"The hope of real progress against poverty is new," he said, ignoring decades of hope.

The idea is to help poor nations avoid new debts at a time when lender nations and institutions are forgiving old debts.

But Easterly isn't convinced that either a shift to grants or more education will necessarily lift these nations out of poverty.

He notes that the original loans to the poorest countries were highly concessional. Considering inflation, the money was almost free. If the nations didn't use these cheap loans to foster education and health, "what are the grounds they will use the second round [in grants] wisely?" Easterly asks.

Because of this risk, the World Bank and its sister institution, the International Monetary Fund, seek reforms before forgiving debts. But the reforms often don't take place.

Critics say these reforms are often unwise and don't work.

Education itself has not proved to be a magic bullet of economic development. Sometimes teaching jobs go to government supporters, who aren't qualified to teach. Available money goes to salaries and not to textbooks and other educational tools.

In other nations, a landed elite or industrial clique controls the government and wants to keep it that way. They are not keen on educating the majority, who may turn on them if better informed.

Of if an ethnic or tribal group runs the government, it may concentrate education spending on this group and deprive other groups of adequate schooling.

Ethnically divided nations and those with highly unequal incomes tend to make slow economic progress, Easterly finds. "But we can't give up on the world's poor," he emphasizes.

Easterly says the way forward is to create incentives for growth for governments, foreign-aid donors, and individuals.

A lot more foreign aid would also help. At present, Americans give the equivalent of a meager 13 cents per person per day. This foreign aid should be directed to governments engaged in home-grown reforms, not those imposed from outside, says Easterly.

(c) Copyright 2001. The Christian Science Monitor