- The Washington Times - Tuesday, July 31, 2001

Without incentive, action of any sort becomes an improbability. Restated in the words that are the mantra for William Easterly's compelling new book, "people respond to incentives." Drawing on the benefit of four decades of economists' application of intrinsically flawed theory to policy, "The Elusive Quest for Growth" endeavors to outline a fresh approach to remedying the economic woes of the Third World.

Mr. Easterly, senior adviser at the Development and Research Group of the World Bank, argues unequivocally that without adequate incentives for the underprivileged, any policy initiative to foster growth in a fledgling economy is doomed to failure. Of course, hindsight is the antecedent of lucidity, and the former is one of Mr. Easterly's best friends in constructing his argument. It comes as a revelation to no one that the tropics are in varying states of economic catastrophe, and thus Mr. Easterly can explain away past failures while paving the way for future solutions. To his credit, he holds out the caveat that "the new incentive-based views of growth could turn out to be as badly misguided as the panaceas that failed," though he reminds us that his proposal addresses economic growth at a more fundamental level than previous efforts.

As economists began scrambling for solutions to the emerging Third World crises, they focused on aid for investment spending. Machinery, however, is not the only component of economic growth, and simple economics dictates that to steadily add machine after machine to an otherwise stagnant economy will invariably lead to a decline in the returns each machine produces.

When tangible benefits from funneling money into physical capital failed to materialize, experts shifted their faith to education programs. Education, or investment in human capital, "is another magic formula that failed us on our quest for growth." For education is not an automatic provider of marketable skills, and through mismanagement and underfunding it has too often become a breeding ground for corruption. Indeed, through a wisely chosen set of graphs, Mr. Easterly illustrates the sheer absence of a correlation between education and GDP.

When the population alarmists began rumbling about a neo-Malthusian apocalypse, it was assumed that curbing population growth would directly fuel development. Population control as a solution is an easier bomb to defuse, for growth in population has been concurrent with growth in per capita income. Further, those who would limit population growth in order to facilitate development are turning a blind eye toward the incontrovertible fact that a growth in affluence leads to a decline in birth rate.

Rounding out the tour, economists arrived at the issuance of loans aimed at policy reforms in the Third World. When longstanding loans delivered nothing of what they promised, and instead turned into a well- intentioned but crippling form of financial bondage, economists came full circle and began to advocate debt relief. Aid with a blind eye to a corrupt or mismanaged government is a Band-Aid, no more effective than aspirin for a dying man. And then if the debt is forgiven, the incentive for legitimate reform is completely negated.

In arguing that there is no magical elixir for development in the tropics, Mr. Easterly contends that each panacea overlooked the essential oil of any economic engine. Incentives come in many forms, and must be readily available for governments, donors and individuals alike. This means that governments must encourage a healthy private sector while cracking down on black markets. Donors such as the World Bank must support governments that have a good track record and will encourage infrastructure development, so they can expect a strong return on their investment. And for private citizens, Mr. Easterly recommends a program of matching grants that would emphasize individual achievement, so the poor but ambitious will not be shackled by their less motivated peers.

The virtually abject failure of 40 years of think-tank production and policy work has had devastating results. Diligently resistant to the economist's propensity for statistical overload, Mr. Easterly reminds us of the wretched human plight economic mismanagement has inflicted on the Third World. At the end of each chapter, the author includes an intermezzo that, while at times incongruous, illustrates Third World hardship and destitution with poignant humanity.

Around the third chapter, even the most meticulous reader will have lost count of the number of times the watchwords "people respond to incentives" have appeared on the page. The conclusion that Third World populations need to be allowed to help themselves for healthy development to occur is axiomatic. While his unflinching commitment to incentives offers a fine theoretical groundwork, Mr. Easterly's greatest service with this book has been to hack away the ill-considered growth recipes that have ironically and tragically blocked the very development they were designed to generate.

Kenneth Corbin is an editorial writer for The Washington Times.

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