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

• 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
• ISSN: 1381-4338; 1573-7020
• DOI: 10.1023/A:1011378507540

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.