The Lost Decades: Developing Countries' Stagnation in Spite of Policy Reform 1980-1998

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 regression...

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Bibliographic Details
Published in:Journal of economic growth (Boston, Mass.) Mass.), 2001-06, Vol.6 (2), p.135-157
Main Author: Easterly, William
Format: Article
Language:English
Subjects:
Black markets
Debt restructuring
Developing countries
Economic crisis
Economic development
Economic growth
Economic growth rate
Economic policy
Economic reform
Economic stagnation
Economic theory
Economics
Fertility
Gross domestic product
Infrastructure
Interest rates
LDCs
Life expectancy
Low income groups
Per capita
Per capita growth
Regression analysis
Stagnation
Studies
Terms of trade
Trends
Variables
World Bank
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Summary: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.
ISSN:1381-4338
1573-7020
DOI:10.1023/A:1011378507540