Economic development for LDC's

How do Less Developed Countries achieve rapid economic development? Economist Brad DeLong reviewed "William Easterly (2001), The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics (Cambridge: MIT Press: 026205065X)." The following is his final conclusion and evaluation of the NeoLiberal projects to cause third world nations to industrialize based on the book.

In Easterly's view, there are a few big lessons from the history: "Prosperity happens when all the players in the development game have the right incentives. It happens when government incentives induce technological adaptation, high-quality investment in machines, and high-quality schooling. It happens when donors face incentives that induce them to give aid to countries with good policies where aid will have high payoffs, not to countries with poor policies where aid is wasted. It happens when the poor get good opportunities and incentives... It happens when politics is not polarized between antagonistic interest groups, but there is a common consensus to invest in the future. Broad and deep development happens when a government that is held accountable for its actions energetically takes up the task of investing in collective goods like health, education, and the rule of law..."

It is clear that the neoliberal policy prescriptions--try to make government honest and smaller (so it doesn't have its fingers in as many economic decisions), try to keep the macroeconomy stable, and boost world trade and thus cross-border economic links as much as possible--affect only a small proportion of these requirements for successful economic development. Neoliberal policy prescriptions have little ability to create governments that energetically invest in collective goods, a political system that enforces accountability, a national consensus for growth, and a commitment by donors to reward success only.

Thus there is a sense in which neoliberalism as we know it is a counsel of despair. Most of what is needed is beyond its reach. The hope is that privatization and world economic integration will in the long run help create the rest of the preconditions for successful development. But we are playing this card not because we think it is a winner, but because it is the last one in our hand.

It is my belief that industrialism and modernization are between them the finest wealth producing system mankind has ever developed, but that the society to be developed has to change a great deal before industrialization is possible. The thing is, the only real tools for changing a society are luck and government. When we attempt to industrialize third world nations we are by definition attempting to develop those societies which have not had the necessary luck to achieve industrialization on their own.

So government has to somehow do the job. The local governments haven't been especially effective either nor have the western governments and mulitnational corporations done much good in most LDS's, but they really are all there is. So we will need to get a lot smarter about what changes are really necessary to set up the necessary incentives and then push to get people to follow them.