Easterly's Elusive Quest for Growth

1. On Easterly’s Elusive
Quest for Growth
Gaurav Sukhija, IITGN
March 11, 2014

2. “Politicians are the same everywhere.They
promise to build bridges, even where there
are no rivers”
Nikita Krushchev

3. What is capital?
Produced means of production
Can also mean $$$
The difference is between
physical capital and financial
capital Source: cityofchicago.org

4. Who on earth is
William Easterly?
• Currently an economist at NewYork
University (NYU)
• Previously an economist at the World Bank
• Jeffrey Sachs’ arch nemesis
• A person with a sense of humor

5. What sense of humor?

6. What are we talking
about?
• How can a country achieve sustained
economic growth?

7. No!
• Why capital cannot be a source of
sustained economic growth

8. What reasons does
Easterly give?

9. Solow’s main
conclusion
• Capital cannot be a source of sustained
economic growth because of diminishing
marginal returns to capital

10. What is diminishing
marginal returns?
• Easterly’s pancake story
• Hold one input constant while increasing
the other
• You end up with thin pancakes.

11. Speaking of pancakes
Mmm...
Source: Google Images

12. Why the Solow model
shouldn’t be applied to
the tropics

13. Inconsistent with data
• What the Solow model predicts
• Capital should flow Rich Poor
• What really happens
• in 1990, the richest 20% got 92% of
world investments
• The poorest 20%? 0.1%

14. So then what about the
developing countries?
• Some cases when capital was used and it
led to growth in one country but not in the
other
• Conclusion: Capital cannot be a reliable
source of economic growth

15. He talks of Nigeria and
Hong Kong
• Are the outputs the same?
• Because if they aren’t, apples vs. oranges?

16. Exports in 2011
Source: Harvard-MIT Atlas of Economic
Complexity http://atlas.cid.harvard.edu/
Nigeria Hong Kong

17. In case you’re curious
about India
Source: Harvard-MIT Atlas of Economic