Hubbard on Kenny

June 22, 2009

One of the great things about making your entire book available for free online is that it gets read by all types — even Glenn Hubbard. And since Hubbard has a book of his own to plug, he’ll even enter the aid debate in public. He doesn’t have his own blog, so here’s Glenn Hubbard on Charles Kenny.

Economists and policymakers have engaged in a lively debate over the past quarter century on how best to encourage economic development. Much of this discussion centers on the economic woes of sub-Saharan Africa.

It’s not hard to see why.

Roughly equivalent to the per capita GDP of South Korea in the mid 1950s, the economies of most sub-Saharan African nations have fallen steadily behind since 1960. As South Korea became a high-income OECD country over this time frame, most of Africa remains mired in dire poverty. In throwing out the bathwater of colonial rule, many of the new nations of Africa threw out the baby, too – the liberal business system with it.

We worry too much about GDP growth, says Charles Kenny in his provocative new book THE SUCCESS OF DEVELOPMENT: The quality of life is improving around the world. Says Kenny, “A greater focus on proven approaches to more rapid improvement in health and education may have a significantly greater impact on the quality of life of poor people in poor countries than yet another quest for the grail of GDP growth.”

If only.

There exists no consensus on the merits of Kenny’s arguments for a new big push for quality of life. In the 2004 report of the Barcelona Development Agenda and the 2008 report of the World Bank-sponsored Growth Commission concluded that there is no single set of policies that can be guaranteed to ignite sustained growth. By contrast, much more consensus among economists exists for the power of a vibrant business sector in making possible entrepreneurship, innovation, and growth. The largest sustained per capita growth outliers in recent years are the East Asian tigers, India, China, and Africa’s Botswana and Mauritius, all thank to business, not aid.

In a forthcoming book, THE AID TRAP, Bill Duggan and I focus on BUSINESS as a driver of both growth and economic and social well-being in Africa, just as it has been in the west. Aid focused on charity may still be worthwhile – though that, too is the subject of debate, as Dambisa Moyo’s book DEAD AID points out. But it is reducing barriers to business that can lift prospects for growth and innovation. And the creation of a vibrant domestic business class thrusts forth a political constituency for reform and support for education.

Policy has made advances here beyond the siren calls of rock stars. I admire the Bush administration’s U.S. Millennium Challenge initiative for its attempt to condition additional aid on institutional reforms that could promote business development. Upon closer inspection, though, the Millennium Challenge Account reverts to a top-down approach.

Kenny intends his insights to change the global policy agenda. While defending aid as “(playing) a part in improving quality of life outcomes,” he argues for more support for “global technology and the spread of ideas.”

Yes, but…

As Duggan and I argue, it is a vibrant domestic business sector with supporting business institutions that enables a country to seize the benefits of globally available gains in science and technology.

And to what end? No less than Abraham Lincoln furthered this thought in his famous historical recapitulation:

The advantageous use of steam power is, unquestionably, a modern discovery. And, as much as two thousand years ago the power of steam was not only observed, but an ingenious toy was actually made and put in motion by it, at Alexandria in Egypt.

What appears strange is that neither the inventor of the toy, nor anyone else, for so long a time afterwards, should perceive that steam would move useful machinery, as well as a toy.

The answer to President Lincoln’s question is the ability of business and business institutions to seize the day. To bring President Lincoln’s point to the present, aid can help promote access to drivers of a better life. But it can best do so through advancing business. In THE AID TRAP, Duggan and I argue for a Marshall Plan for Africa.

We cannot and should not stop the flow of aid. There will always be a role for charity, as there is in all rich countries. Giving food, clothing , shelter, and medicine to the poor is a long and noble tradition. That is a good thing. But it is very different from aid for economic development, to bring people out of poverty. For that, we must direct aid to support the business sector – as in the Marshall Plan of post-World II Europe.

Many people think the Marshall Plan was charity aid – food, clothing and medicine for war-torn Europe. But that was the United Nations Relief and Rehabilitation Administration. The Marshall Plan came later. Its single aim was a thriving domestic sector in every single country. And it worked. Aid can indeed help to end poverty, by helping the business sector. The Marshall Plan shows how, as Duggan and I spell out in THE AID TRAP.

Kenny’s very interesting book is right about two big things.

The first is the need for modesty: Aid advocated from Rosenstein-Rodan’s “big push” to Jeffrey Sachs’ call for ambitious global spending aim at nothing less than top-down transformation of economies and societies. Not only is such an approach at variance with the west’s trajectory toward prosperity, it has not worked. After nearly one trillion dollars of aid since World War II, much of sub-Saharan Africa remains mired in dire poverty.

The second is attitude of optimism: As global citizens, we should not accept the consignment of tens of millions of Africans to extreme poverty. And we can make progress. But it will be more in the way of Friedrich Hayek than Selma Hayek (to borrow a phrase from Bill Easterly). It will be through a concerted effort to promote a vibrant business sector from the bottom up.

But will bottom-up approach improve the quality of life.

Yes. As my Columbia colleague Edmund Phelps noted in his lecture accepting the 2006 Nobel Prize in Economics, workers are more satisfied in dynamic economies with a robust entrepreneurial sector and support for research and development.

So economic growth may not be so removed the good life after all.


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