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 1 2001

    Keywords

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

    ASJC Scopus subject areas

    • Economics and Econometrics

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