driwp15 - 1 Reliving the 50s the Big Push Poverty Traps and Takeoffs in Economic Development1 William Easterly NYU Keywords Poverty trap economic

driwp15 - 1 Reliving the 50s the Big Push Poverty Traps and...

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1 Reliving the 50s: the Big Push, Poverty Traps, and Takeoffs in Economic Development 1 William Easterly NYU Keywords: Poverty trap, economic development, economic growth, foreign aid October 2006 Abstract: The classic narrative of economic development -- poor countries are caught in poverty traps , out of which they need a Big Push involving increased investment, leading to a takeoff in per capita income -- has been very influential in foreign aid debates since the 1950s. This was the original justification for foreign aid. The narrative lost credibility for a while but has made a big comeback in the new millennium. Once again it is invoked as a rationale for large foreign aid programs. This paper applies very simple tests to the various elements of the narrative. Evidence to support the narrative is scarce. Poverty traps in the sense of zero growth for low income countries are rejected by the data in the whole period 1950-2001 and for most sub-periods. The poorest quintile also does not have significant negative growth of the relative income ratio to the world’s richest country over 1950-2001, nor is relative growth for the lowest quintile significantly different than other quintiles. The claim that “well-governed poor nations” are caught in poverty traps is rejected by simple regressions that control for both initial income and quality of government (instrumenting for the latter). The idea of the takeoff also does not garner much support in the data. Takeoffs are rare in the data, most plausibly limited to the Asian success stories. Even then, the takeoffs are not associated with aid, investment, or education spending as the standard narrative would imply. 1 I am grateful from comments from participants in seminars at the World Bank, the Central Bank of Chile, Northwestern University, the CESIfo Venice Summer Workshop on Political Economy and Development, and the IFPRI/Cornell Conference on Threshold Effects and Non-Linearities in Growth and Development, and from the editor, 3 anonymous referees, Daron Acemoglu, David Canning, Rómulo Chumacero, Michael Clemens, Steven Durlauf, Oded Galor, Ravi Kanbur, Aart Kraay, Michael Kremer, Norman Loayza, Luis Serven, Chih Ming Tan and Xiaobo Zhang. I am very grateful for research assistance and comments from Julia Schwenkenberg.
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