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

Posted: 24 Jan 2006

See all articles by William Easterly

William Easterly

New York University - Department of Economics

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 1960-79 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.

Keywords: Economic growth, policy reforms, economic stagnation, debt crisis

JEL Classification: O1, O4

Suggested Citation

Easterly, William, The Lost Decades: Explaining Developing Countries' Stagnation in Spite of Policy Reform 1980-1998. Journal of Economic Growth, Vol. 6, No. 2,pp. 135-157, June 2001. Available at SSRN: https://ssrn.com/abstract=876630

William Easterly (Contact Author)

New York University - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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