Postmezzo: In search of virtuosity

Similarly to Chris, I had a complete change in opinion of Easterly once I started reading section III. Although I thought it was interesting to put statistics to the many development policy failures I was slightly familiar with, I felt that part II gave short shrift to these “panaceas.”

The best example of this tension between parts II and III that I found was his discussion of Solow. Since I’ve had several classes which turned to the Solow growth model as a saving grace for the developed world I was shocked to have Easterly reject that in part II. The complaint that less developed nations have barely grown at all rather than converge towards the more developed nations seems to be quite damning evidence against the classical Solow model. Furthermore, Easterly attacks the idea that nations must merely overcome a transition period of increased investment to achieve the optimal level of current and future consumption. While his claims seem to be valid, I felt he abandoned the idea of investment too quickly. This, however, turned out to be planned once I began reading chapter 8. To the best of my understanding, proposals he makes for increasing returns would completely change the shape of the Solow model. (This is something I’d really like to discuss tomorrow) As a result, the divergence which empirical evidence suggests can be more readily explained. Now one enters a world where a corporation would receive greater returns from investment in labor or capital in the more developed world. However, the shapes which I was left with for the model still demand investment. Although there is less of a transition period, per se, foreign aid and world bank investment would actually seem to help developing nations even more in this modified model than in the classical Solow model. Increasing marginal returns would imply that new investment in education or infratstructure would actually make future investments even more lucrative, possibly moving a nation from a vicious to a virtuous cycle.

Several examples can be found where Easterly’s models from section III could be applied to encourage further use of his “failed panaceas.” Couldn’t loans and investment aid be focused on creating complementary technologies such as roads and computer systems? Why does Easterly abandon Mankiw’s analysis of secondary education as a determinant of growth when his own model would imply that exactly that kind of education could encourage the increasing returns of matching and leaking? Upon close analysis, I found that Easterly’s “failed panaceas,” might be medicines applied incorrectly or to allergic patients. If corruption and poor policies can be addressed, I see no reason why capital investment, education, debt forgiveness and adjustment loans couldn’t be used to move developing nations into virtuous cycles.