The lost decades

Developing countries' stagnation in spite of policy reform 1980-1998

William Easterly

    Research output: Contribution to journalArticle

    Abstract

    I document in this paper a puzzle that has not received previous attention in the literature. In 1980-98, median per capita income growth in developing countries was 0.0 percent, as compared to 2.5 percent in 1960-79. Yet I document in this paper that variables that are standard in growth regressions - policies like financial depth and real overvaluation, and initial conditions like health, education, fertility, and infrastructure generally improved from 1960-79 to 1980-98. Developing country growth should have increased instead of decreased according to the standard growth regression determinants of growth. The stagnation seems to represent a disappointing outcome to the movement towards the "Washington Consensus" by developing countries. I speculate that worldwide factors like the increase in world interest rates, the increased debt burden of developing countries, the growth slowdown in the industrial world, and skill-biased technical change may have contributed to the developing countries' stagnation, although I am not able to establish decisive evidence for these hypotheses. I also document that many growth regressions are mis-specified in a way similar to the Jones (1995) critique that a stationary variable (growth) is being regressed on non-stationary variables like policies and initial conditions. It may be that the 1960-1979 period was the unusual period for LDC growth, and the 1980-98 stagnation of poor countries represents a return to the historical pattern of divergence between rich and poor countries.

    Original languageEnglish (US)
    Pages (from-to)135-157
    Number of pages23
    JournalJournal of Economic Growth
    Volume6
    Issue number2
    DOIs
    StatePublished - Jun 2001

    Fingerprint

    Stagnation
    Policy reform
    Developing countries
    Growth regressions
    Initial conditions
    Overvaluation
    Less developed countries
    Median
    Per capita income
    Interest rates
    Financial depth
    Divergence
    Factors
    Fertility
    Health education
    Debt
    Burden
    Washington Consensus
    Skill-biased technical change
    Income growth

    Keywords

    • Debt crisis
    • Economic growth
    • Economic stagnation
    • Policy reforms

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    The lost decades : Developing countries' stagnation in spite of policy reform 1980-1998. / Easterly, William.

    In: Journal of Economic Growth, Vol. 6, No. 2, 06.2001, p. 135-157.

    Research output: Contribution to journalArticle

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