U5291695

Critical Review Assignment

Critical review of the chapter The loans that were, the growth that wasnt of the book The elusive quest for growth: economists adventures and misadventures in the tropics by William Easterly

A. H. M. Jamery Hasan

07 February 2013
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Critical Review Assignment

The impact of adjustment lending on the growth of the recipient countries is a highly debated issue in the contemporary international development community. In the chapter the loans that were, growth that wasnt of his book The elusive quest for growth: economists adventures and misadventures in the tropics William Easterly, Professor of Economics at New York University, examines the effect of adjustment lending on the growth of the recipient countries. He argues that intensive adjustment lending by the World Bank and IMF failed to stimulate growth in the recipient countries (Easterly, 2002). This paper will argue that although Easterly (2002) puts forward some convincing arguments and suggests a radical change in the future lending policies of the donors, his argument falls short of taking account of the numerous other factors that affect the relationship between adjustment lending and growth, and his

recommendations fail to consider the many complexities that the developing world faces. Firstly, Easterly (2002) observes that the donors shifted from a policy of aid financing investments to a policy of aid financing reforms with an aim to foster growth in the recipient countries.. He then provides examples of some successful cases of this strategy as in Ghana, Korea, Thailand, Mauritius and Argentina, where either there was intensive donor involvement or there were successful reforms. However, for most countries, in Easterlys words, The lending was there, but the growth wasnt.(Easterly 2002, p.103). In his analysis of the reasons of the failure of adjustment lending, Easterly (2002) reports that donors were engaged in indiscriminate lending despite wrong economic policies adopted by countries like Zambia, Mauritania, Cote DIvore, Kenya and Pakistan. He also points out that loans were often given to corrupt governments from strategic interest perspective rather than on the grounds of economic under-development. Often countries used different economic strategies to avert the policy reforms tied with the adjustment loans they received (Easterly 2002). Easterly (2002) adds that by incurring excessive debt many countries were also risking their future well-being. After analysing the origin of the failure of adjustment loans, Easterly (2002) links it to the donors lending policies. He then concludes that the failure could have been averted if loans were given to countries with better policies. He further recommends that countries that reformed well in the past should be assisted rather than countries that promise future reforms, and assistance should increase with the rise of income level of the recipient counties.
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Critical Review Assignment

Easterlys (2002) analysis of the causes of the failure of the adjustment lending is a very comprehensive one. He successfully identifies the conditions necessary for successful outcome of the adjustment loans as well as points out clearly the reasons that made this policy a failure in a number of countries across the globe. Easterly (2002) seems to be equally critical of the recipients as well as the donors roles in policies involving adjustment loans. His conclusion that loans should only be tied with past performance in reforms instead of future promise of making them is also supported by Svensson (2002, p.1) who claims that if donors reward countries with good policies with more loans, it would provide better incentives for recipients as well as the donors themselves, and the long term impact on the poverty level would be positive. Moyo (2009) even goes beyond Easterly (2002) and Svensson (2002) into claiming that aid is actually hurting Africa by creating a cycle of corruption, slowing economic growth and sustaining poverty. Easterly (2002) clearly demonstrates his in-depth knowledge of the real circumstances faced by the donors and recipients of aid by identifying the problem accurately and arguing for a radical shift in the policy of lending. However, Easterly (2002) assumes a too direct and somewhat simplistic relationship between aid and growth that if aid works growth will inevitably occur. Contrary to his view, Rajan and Subrmanian (2008) find little robust evidence of a positive (or negative ) relationship between aid inflows into a country and its economic growth. Easterly (2002) also advocates that adjustment lending works in countries with better policy performance and will always work in such circumstances. But this point does not follow Rajan and Subramanians (2008) findings that there is no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Moreover, Easterlys (2002) claim that aid would have had a positive impact on growth if the recipients have had good policies. does not take into consideration the constraints poorer developing countries encounter in implementing reforms. As Morrissey (2004) notes that due to their least administrative and institutional capacity, the poorest countries often fails to implement policy reforms. Furthermore, the analysis Easterly (2002) makes seems to be based more on opinion rather than evidence. He provides little empirical evidence or statistical data supporting his claim. He refrains from discussing how he would account for the other noneconomic factors such as political, social, geographical and historical perspectives that a country might face in its pathway towards growth. So, Easterlys methodology to reach such a conclusion as he postulates does not seem to be very sound.
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Critical Review Assignment

Therefore, the most significant weakness in Easterlys (2002) arguments seems to be his conclusion asserting that aid should be tied with past performance, not with future promises to reform. He even goes further into suggesting that aid should be channelled only to countries with good policies regardless of relative poverty level. His view assumes that the donors have no role to play with countries with bad policies. In contrast to this view, Morrissey (2004) argues that the poorest countries lack the capacity to initiate policy reforms and donors should help governments to select their own policy instead of compelling them to select one from the donors prescription. All in all, The loans that were, the growth that wasnt is a thought provoking chapter by Easterly (2002). It meticulously draws readers attentions to the overarching fact that adjustment lending has not worked as a policy tool and its modality should be reengineered. However, Easterly (2002) proposes a policy that would ultimately punish the poorest developing countries due to their poor capacity in implementing policy reforms. So, although Easterly (2002) correctly urges for a radical change in policy, the new policy cannot be one that excludes the poorest developing countries who are struggling to implement reforms. Surely, we have the ability to come up with a solution that is more creative and serves the poorest, the poorer as well as the developed countries.

Total Word Count (including in text citations): 1110

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Critical Review Assignment

References Easterly, W. 2002, The loans that were, the growth that wasnt. The elusive quest for growth: economists adventures and misadventures in the tropics, MIT Press, Cabridge, Massachusetts, pp. 101-120. Moyo, D 2009, Why foreign aid is hurting Africa, The Wall Street Journal (online edition), 21 March, viewed 06 February, 2013, <gttoL..ibkube,wsj.com/article/SB123758895999200083.html> Morrissey, O 2002, Conditionality and aid effevitveness re-evaluated, revised version of paper prepared for UNU/WIDER Project Meeting on Sustainability of External Development Financing, 23-24 August 2002, Helsinki. Rajan RG & Subrananian, A 2008, Aid and growth: what does the cross country evidence really show?, The Review of Economics and Statistics, November 2008, vol. 90, no.4, pp.643-665. Svensson, J 2003, Why conditional aid does not work and what can be done about it, Journal of Development Economics, vol.70, pp.381-402.