Book Review: The Great Escape

Book Review: The Great Escape

Matthew Vethecan
TheoryInternationalEconomic Development
March 18, 2014

The past two and a half centuries have witnessed the largest and most spectacular increase in human wellbeing in history. Economies accounting for the majority of the world’s population have grown exponentially, supporting rapid population expansions while raising material living standards. At the same time, life expectancy in most parts of the world has soared. A child born in sub-Saharan Africa today is more likely to live to the age of five than a child born in the UK just a century ago.

Angus Deaton, an economist at Princeton, gives a broad overview of both of these dimensions of progress, telling the intertwined stories of the economic and medical progress that have shaped the modern world. His thesis is largely positive: mankind has made significant progress raising its wellbeing.

Firstly, people are wealthier than ever before. Between 1820 and 1992, the proportion of people living in extreme poverty around the world fell from 84 to 24 percent. Deaton identifies the Industrial Revolution as a turning point in economic development, upending centuries of stagnation. Powers in Western Europe and Northern America enjoyed growth at an unprecedented rate and scale, opening up a “Great Divergence.” Growth in those countries continued to accelerate following World War II.

However progress has been largely positive in the developing world too. Pivotal in Deaton’s narrative is the role of India and China, whose combined populations account for around a third of the world population. The last three decades of rapid economic growth, particularly in China, has helped pull hundreds of millions of people out of poverty, and narrowed the gap with the developed world. According to the World Bank, the number of people living on less than $1.25 per day was 1.22 billion in 2010, compared with 1.94 billion in 1981.

Secondly, people are healthier than ever before. Deaton makes ample use of graphs and data to support this point. He attributes increases in health to both increased nutrition, which enabled people to grow bigger and stronger, and the control of disease through public health measures. Improvements to sanitation and a clean water supply, for instance, reduced the spread of diseases. The discovery of germ theory and the widespread introduction of vaccination program helped push infant mortality rates even lower.

A crucial point Deaton makes, building on the work of the Nobel Laureate Robert Fogel, is that the effects of health and wealth are self-reinforcing. When a person suffers poor nutrition, they may fall into a nutrition trap: the person’s potential income is reduced because they are too physically weak to work, but without that work they cannot afford the food required to escape the situation. In contrast, a healthier population is capable of working longer and more productively, generating income which can in turn provide for better nutrition and public health. Improvements in health and wealth feed off each other in a virtuous circle.

The result is that people today have higher incomes, life expectancies and general wellbeing than previous generations could have imagined.

However the story of escape to prosperity cannot be told without the story of those left behind. Progress in health and wealth often lead to greater global and domestic inequality, in an “endless dance between progress and inequality.” And the gap this has opened up with the world’s poorest is stark:

“Almost a billion people still live in material destitution, millions of children still die through the accident of where they are born, and wasting and stunting still disfigure the bodies of nearly half of India’s children.”

How should we in the developed world respond to this? Deaton starts by considering an analogy formulated by Peter Singer. If a person sees a child drowning in a pond, most people would consider that they have a moral obligation to save the child, even if it risked damaging their clothing. Followed logically, the same obligation to assist applies to affluent people vis-à-vis those suffering in developing countries; the fact that the people are further away is morally irrelevant.

The moral imperative, then, may be to provide more aid. Many proponents of aid, including Jeffrey Sachs, an economist at Columbia University, advocate a “hydraulic model of aid.” Sachs sees an interrelated troika of problems: a savings trap, in which people in developing countries are too poor to save and invest in capital which could improve their income, capital thresholds, which require basic capital, for instance roads and electricity, before efficient production can begin, and a demographic trap, which tends to increase fertility rates and population growth.

Sachs argues that these problems must be solved simultaneously, that aid intervention must necessarily be big and that it should be coordinated with a plan. Accordingly, Sachs identifies areas which need improvement, sums the costs and concludes that these problems can be fixed together with a “Big Push.” This view forms the intellectual backbone of many of today’s leading anti-poverty initiatives, including the Millennium Development Goals.

However in Deaton’s view this approach is likely to fail, as the problem is not one of a lack of resources. Indeed, total official aid flows from the governments of developed countries reached $133.5 billion in 2011 – enough, if perfectly distributed, to end extreme poverty. Instead, it is corrupt and ineffective institutions, coupled with rotten politics at both ends that hamper development.

Firstly, allocation of foreign aid by donor countries is often shaped by political and strategic considerations. Former colonies and political allies of the donor country are often large beneficiaries of aid. More worryingly, the level of corruption in a country does not appear to affect the amount of aid it receives; at its worst, aid flows have helped consolidate the power of dictators and tyrants. Another issue is that, as Deaton puts it, money is given to countries rather than people, resulting in questionable aid allocation. Samoa, for instance received $802 per capita in 2010, while the highest amount of aid per capita ever in India was $3.10.

There are also numerous problems with way aid is structured, and often “donors decide matters that should be decided by recipients.” Tied aid for instance, which requires that foreign aid must be spent in the donor country, can reduce the overall effectiveness of that money in bringing relief to a population.

Problems delivering aid are not unique to countries, and organisations involved in providing aid have significant weaknesses of their own. The United Nations Development Program, which coordinates UN activities in over 150 countries, has been rated both one of the least efficient and least transparent donors. Politics appears as the antagonist again: multilateral organisations cannot completely ignore the demands of the countries which provide its funding.

The problems with aid are multiplied when the recipient nation itself has toxic politics and corrupt, extractive institutions. Peter Bauer first identified the dilemma: in countries with good political and economic institutions, aid is not required; in countries with poor institutions, aid is ineffective.

In fact, the issue is more complex still, and Deaton observes that “even in good environments aid compromises institutions, it contaminates local politics and it undermines democracy.” Large aid inflows reduce the need for a government to tax its population to raise revenue, meaning governments are less accountable to their people. In the absence of this this vital feedback mechanism, governments may abandon growth-friendly policies that promote long-term development in favour of extractive ones.

Deaton therefore joins a growing number of prominent economists, including William Easterley and Dambisa Moyo, in criticising foreign aid. He does not consider all aid to be bad. Aid can educate children who would otherwise not have been educated and build vital infrastructure. In particular, aid can save lives, and Deaton advocates aid directed at improving health, both via research funding and public health programs. The eradication of smallpox in Africa, for instance, has brought untold good to the continent.

However the good that aid brings must be weighted against its ills, and Deaton believes that aid harms nations and their people in the long term. He points to the inverse relationship between aid and economic growth in the developing world over the past few decades. On average, growth decreased steadily while aid increased between 1975 and 1995. When aid fell following the end of the Cold War, growth picked up. This finding is supported by more exhaustive studies, including one by Raghuram Rajan and Arvind Subramanin which concludes that foreign aid fails to stimulate economic growth in either the short or long term, regardless of the source of the aid or the strength of the recipient country’s institutions.

This is not a unanimous view. Sachs for instance writes that “research distinguishing the types and timing of aid has shown that development aid raises economic growth.” David Dollar, Craig Burnside, and Paul Collier have found that aid can promote growth when recipient countries have strong economic policies and sound institutions. The mixed findings can be attributed to the fragility of the data being tested. Subramanin and Rajan, for instance, find that basic changes of assumptions and methods can change the results to support either position.

Nonetheless, Deaton concludes that “the record of aid shows no evidence of any overall beneficial effect.”Aid weakens institutions, undermines democracy and imperils long-term prosperity. It follows that aid should be reduced. So what should we do to alleviate poverty? Deaton challenges this question, asking “why is it we who must do something? Who put us in charge?” Instead, the developed countries should leave developing countries to develop on their own, in their own time, just as the West itself did.

The Great Escape is a broad book with big implications. Mankind has moved inexorably forward over the past few centuries, and even through wars and financial crises has continued to raise living standards generation after generation. However progress should never be taken for granted. Climate change, the threat of global pandemics, aging populations, economic instability, rising inequality and dangerous politics all loom ominously over future generations. Yet Deaton remains cautiously optimistic: tenacity, experience and the unshakable desire to escape will be on our side.