Reliving the 1950s

Abstract

1. Introduction to Economic Development Narrative:

 The abstract begins by referencing the classic narrative of economic development,
which posits that poor countries are ensnared in poverty traps and require a
substantial push through increased investment to initiate a significant rise in per
capita income.
 This narrative has played a crucial role in foreign aid discussions since the 1950s,
originally serving as the primary justification for foreign aid.
2. Resurgence of the Narrative:
 Despite losing credibility at some point, the narrative has experienced a
resurgence in the new millennium, becoming a key rationale for advocating large
foreign aid programs.
3. Testing the Narrative:
 The paper conducts simple tests on different elements of the economic
development narrative.
 Scarcity of Supporting Evidence:
 The abstract highlights a scarcity of evidence supporting the narrative.
 Rejection of Poverty Traps:
 Data analysis covering the period 1950–2001 and various sub-periods
rejects the existence of poverty traps (zero growth for low-income
countries) as implied by the narrative.
 Contradiction for the Poorest Quintile:
 The poorest quintile does not exhibit significant negative growth in
relative income ratio to the world’s richest country over 1950–2001.
 Challenge to the Governance Argument:
 The claim that "well-governed poor nations" are stuck in poverty traps is
refuted through simple regressions that consider both initial income and
government quality (instrumenting for the latter).
 Limited Support for the Takeoff Concept:
  The idea of a takeoff in economic development does not receive
substantial support in the data, with takeoffs being rare and mainly limited
to the Asian success stories.
 Furthermore, the data suggests that these takeoffs are not associated with
aid, investment, or education spending, as suggested by the standard
narrative.

Introduction

In the realm of development policy-making, the once-exiled concept of the Big Push has made a
notable comeback, particularly in the pivotal year of 2005. This resurgence aligns with the global
endeavor to achieve the Millennium Development Goals (MDGs) by 2015, prompting an
intensified focus on foreign aid. The UN Millennium Project's report, commissioned by Kofi
Annan, plays a pivotal role, asserting that impoverished nations find themselves ensnared in a
"poverty trap." Escaping this trap, as articulated, necessitates a comprehensive Big Push,
encompassing investments in public administration, human capital, and critical infrastructure.
Sachs' Advocacy and Financial Imperatives
Jeffrey Sachs, a prominent figure in this narrative, advocates for a financial plan to fund the
investment plan for MDGs, emphasizing a substantial increase in aid. The underlying belief is
that such aid infusion will naturally precipitate a takeoff in economic development.
Political Endorsements and Global Organizations' Call to Action
The advocacy for a Big Push is not confined to the academic realm; it has garnered political
endorsements, including support from British Prime Minister Tony Blair and influential
international organizations like the World Bank and IMF. These endorsements underscore the
imperative of a Big Push, augmented aid, and even debt cancellation to fuel economic growth in
Africa.
Continued Advocacy: The Momentum in 2006
The enthusiasm for the Big Push continues into 2006, with bodies like the UNCTAD and the
United Nations Economic and Social Council advocating for large-scale aid as a means to break
the poverty trap.
Takeoff and Ambitious Growth Targets
Central to this discourse is the concept of a "takeoff," with various sources proposing ambitious
growth targets (e.g., 8% per year) as prerequisites for meeting MDGs and effecting a substantial
reduction in poverty rates.
Historical Lens: Echoes Over Half a Century
An interesting historical perspective is introduced, emphasizing linguistic similarities over the
past 50 years concerning the need for a comprehensive approach to economic development.
Empirical Exploration: Unveiling Three Inter-Related Concepts
The paper sets out to empirically explore three inter-related concepts: the Big Push, the Poverty
Trap, and the Takeoff. The primary focus lies in testing the specific hypotheses related to
poverty traps and takeoffs, as implied by the argument for aid financing. This distinguishes the
paper's scope from the broader literature on per capita income convergence.
Rich Country Experience: Distinct Narratives
A distinction is drawn between the experiences of rich countries and those slated to receive aid,
underscoring the paper's primary focus on recent development experiences of potential aid
recipients.
Engaging with Growth Literature: A Nuanced Approach
Acknowledging the growth literature on poverty traps, the paper commits to testing the classic
aid narrative despite differences in the conceptualization of poverty traps.
Caution in Conclusions: A Prudent Approach
The introduction concludes with a note of caution, clarifying that the paper seeks to assess
whether the classic aid narrative holds, refraining from making assertions beyond this specific
evaluation.

Intellectual history

Founding Ideas: Rosenstein and Rodan's Pioneering Article (1943)

In 1943, Paul Rosenstein and Rodan laid the cornerstone of development economics with their
article, "Problems of Industrialization of Eastern and South-eastern Europe." Advocating for
large-scale externally-financed investment in Eastern European industry, Rosenstein introduced
the concept of the "Big Push." This idea, emphasizing the necessity of external aid to stimulate
industrialization, echoed through the subsequent decades, shaping the development discourse.
Parallel Narratives: Development Economics of 1940s–1950s and Today
The echoes of the 1940s and 1950s resonate with contemporary ideas, particularly the revival of
the "Big Push" concept. Similarities include the call for a substantial push to extricate countries
from a perceived "poverty trap," the role of foreign aid to fill the "Financing Gap," and
comprehensive planning across multiple fronts.
Historical Counterpart: Rostow's "The Stages of Economic Growth" (1960)
Walt Rostow's influential work, "The Stages of Economic Growth," serves as the historical
counterpart to Jeffrey Sachs' 2005 publication, "The End of Poverty." Both advocate aid-
financed increases in investment to propel countries from stagnation to self-sustained growth,
emphasizing the notion of a developmental "takeoff."
Renewed Attraction: Sachs' Contemporary Advocacy
Sachs' 2005 work exemplifies the renewed appeal of the poverty trap narrative. He posits various
reasons for the poverty trap, such as insufficient savings by the poor in both physical and human
capital. This perceived lack creates the need for a foreign aid-fueled "Big Push" to overcome the
low savings trap.
Elements of the Poverty Trap: Testing the Narrative
Sachs identifies three key elements constituting the poverty trap. First, low savings by the poor,
hindering capital accumulation. Second, nonconvexities in the production function, marked by
increasing returns to capital at low initial levels. Third, population growth exacerbating poverty,
potentially leading to stagnant per capita income. The paper commits to testing the classic
narrative's version of these elements, focusing on the specific hypotheses implied by the
argument for aid financing.
Governmental Influence: The Role of Policies and Institutions
While the classic aid narrative pays little attention to the influence of bad policies and
institutions on poverty, the current discourse similarly downplays the impact of governance on
economic development. The focus remains on the poverty trap as the primary explanation for the
poor growth of low-income countries, sidelining the bad government narrative.
Theoretical Underpinning: Neoclassical Model and Poverty Traps
The classic aid narrative aligns with the neoclassical model, particularly the Solow model,
highlighting absolute income per raw unit of labor. This model, without technological change,
forms the basis for the poverty trap narrative, emphasizing a threshold capital stock for countries
to escape the poverty trap.
Evolution of Poverty Trap Models: Insights from New Growth Literature
Recent models in the new growth literature explore various dimensions of poverty traps,
including human capital poverty traps and relative poverty thresholds. The literature challenges
the simplicity of the classic aid narrative, presenting nuanced models that diverge from the rapid
takeoff envisioned in the aid discourse.
Empirical Exploration: Contrasting Predictions and Conditional Convergence
Empirical work on poverty traps and convergence explores contrasting predictions. The classic
aid narrative suggests abrupt takeoffs, while empirical studies often find conditional convergence
—raising questions about the validity of the specific predictions made by the aid narrative.
Testing the Classic Narrative: Empirical Verification or Falsification
Amidst the complexities of generalized poverty trap literature, the paper takes a simpler
approach, focusing on empirical tests of the specific and strong predictions made by the classic
aid narrative. This pragmatic approach aims to verify or falsify the narrative's claims about
poverty traps and takeoffs.

Testing the poverty trap

The text explores the concept of an absolute poverty trap, emphasizing the idea that certain
countries may be caught in a low-income equilibrium. This trap is often associated with factors
such as low savings, nonconvexities in production, and high population growth. The underlying
assumption is that external interventions, particularly through foreign aid, are necessary to break
this cycle and stimulate sustained economic growth.
Evaluation of the Poverty Trap: Despite theoretical propositions about the existence of an
absolute poverty trap, the author critically examines empirical evidence. The focus is on growth
rates over time, and the analysis challenges the consistent occurrence of lower growth in the
poorest countries. The author questions the broad applicability of the poverty trap hypothesis,
suggesting that not all economically disadvantaged nations fit this narrative.
Role of Foreign Aid: The text scrutinizes the role of foreign aid in addressing the challenges
posed by the poverty trap. It highlights a discrepancy between expected high returns to capital in
poor countries and the actual outcomes of foreign aid. The narrative suggests that, in some cases,
foreign aid has been directed more towards consumption than productive investment. The
anticipated transformative impact of aid, often referred to as a "big push," has not materialized
uniformly.
Testing Empirical Predictions: To assess the validity of the poverty trap hypothesis, the author
employs statistical tests and analyzes empirical data. These tests include examinations of growth
rates, the stationarity of income, and the correlation between foreign aid and economic
performance. The objective is to provide concrete evidence that either supports or challenges the
theoretical predictions.
Nuanced Findings: The analysis reveals a nuanced perspective on economic growth among
different income quintiles. It challenges the notion that the poorest countries consistently exhibit
significantly lower growth rates, introducing complexity into the understanding of poverty traps.
The examination of empirical data offers a more nuanced and context-specific view of economic
development.
Consideration of Other Factors: The text briefly considers the impact of terms of trade
changes on economic growth. This factor introduces an additional layer of complexity,
suggesting that improvements in terms of trade may influence economic growth independently of
the poverty trap dynamics. The author prompts a consideration of multiple factors in
understanding the intricacies of economic development.
Relative Poverty Traps:

Concept of Relative Poverty Traps:

The text delves into the concept of relative poverty traps within the neoclassical model,
acknowledging that countries might not necessarily converge at the same rate as the
technological frontier. This form of poverty trap is defined by the relative decline of the poorest
countries compared to the technological leaders, challenging the assumption of universal
convergence.
Empirical Examination:
The author conducts an empirical analysis, utilizing Table 3 to examine the average annual
change in the log of the ratio of countries' per capita income to US per capita income. The focus
is on identifying patterns in growth rates relative to the technological frontier, particularly for the
poorest quintile. Results indicate that, for the entire period 1950–2001 and 1950–1975, the
poorest quintile does not exhibit a significant tendency to fall behind. However, in the periods
1975–2001 and 1985–2001, there is a significant negative growth trend, suggesting a potential
relative poverty trap.
Complex Findings:
The text acknowledges the complexity of the findings, highlighting inconsistencies between
different periods. It emphasizes the importance of considering changes in country composition
within quintiles over time. The results challenge a straightforward interpretation of relative
poverty traps, indicating nuanced dynamics among quintiles.
Absence of Absolute Convergence:
Contrary to the neoclassical model's prediction of absolute convergence, the analysis reveals no
consistent tendency toward it. Instead, the findings align with the idea of separate steady states
for each country, a departure from the expected universal convergence.
Signs of Absolute Divergence:
The text notes a noteworthy pattern where signs on relative income growth are negative in the
bottom three quintiles and usually positive in the top two quintiles. This hints at a potential
absolute divergence, challenging the conventional narrative of poverty traps mainly affecting the
poorest countries.
Future Considerations:
The text hints at further exploration into the positive association of growth with lower income,
questioning whether it reflects the intrinsic nature of lower income or is correlated with
governance issues. This suggests a broader consideration of factors influencing economic
performance beyond the scope of income levels alone.
Are well-governed countries in poverty traps?

The text explores the classic aid narrative suggesting that "reasonably well-governed countries
are too poor to make the investments to climb the first steps of the ladder." It conducts non-
parametric tests and linear regression analyses to scrutinize whether a "well-governed poverty
trap" exists, aiming to determine if countries with good governance but low income face growth
constraints.
Non-Parametric Tests: The author employs non-parametric tests, dividing the sample into
groups based on the quality of government and initial income levels. Figure 1 illustrates that
economic growth increases with economic freedom, particularly in high and low-income
countries. A similar exercise with the Polity IV democracy measure reveals that growth increases
with high income or high democracy compared to low levels of both. However, the off-diagonal
cell with high democracy and low income does not show higher growth, challenging the well-
governed poverty trap idea.
Focus on Bad Government: To delve deeper, the analysis focuses on the period 1985–2001,
where evidence of differential and zero growth in the poorest countries exists. Countries with the
worst ratings on corruption and democracy in 1984 are labeled "bad governments." Results
indicate that bad government is significant in explaining lower growth, surpassing the impact of
initial poverty. Controlling for both initial poverty and bad government, bad governance remains
significant, while the effect of initial poverty diminishes.
Linear Regression Results: Linear regression results from Table 4 contradict the hypothesis of
a well-governed poverty trap. Good government robustly predicts higher growth, while higher
income predicts lower growth. This challenges the notion that reasonably well-governed
countries are trapped due to their low income.
Cautionary Notes on Interpretation: The text acknowledges the complexity of the findings and
the challenge of separating the effects of initial income and bad governance. It raises caution
about interpreting the results as definitive evidence against other potential initial conditions
leading to a more general form of poverty trap.

Testing for takeoffs

This section investigates the concept of "takeoffs" in economic development, specifically

addressing whether a sudden transition from zero per capita growth to sustained positive growth
occurs. The analysis critiques the classic narrative that posits a "Big Push" leading to self-
sustained growth, emphasizing the role of foreign aid and increased investment. The study
applies arbitrary mechanical rules to detect takeoffs and scrutinizes historical growth patterns.
Defining Takeoffs: The text employs an arbitrary definition of takeoffs, considering a shift from
zero growth to stable positive growth. The criteria exclude cases where high positive growth
follows negative growth, emphasizing the suddenness of the shift. The analysis notes historical
growth patterns in rich countries, challenging the notion of abrupt takeoffs.
Historical Growth Patterns: Examining historical growth rates in rich countries, the text finds
gradual acceleration rather than abrupt takeoffs. Growth rates increased steadily over centuries,
contradicting the expectations of a sudden switch from stagnation to rapid growth. The closest
approximations to a takeoff are observed in late industrializers such as Ireland, Greece, Portugal,
and Spain.
Patterns in Developing Countries: Analyzing growth patterns in developing countries since
1820, the text highlights the diversity of growth trajectories, including hills, plateaus, mountains,
and plains. The instability of growth challenges the idea of systematic takeoffs. The analysis
identifies only one region, East Asia, meeting the criteria for takeoff, indicating that such
patterns are not prevalent.
Foreign Aid and Takeoffs: The text explores the relationship between foreign aid and takeoffs,
focusing on eight cases around 1950–1975. While three countries (Indonesia, South Korea, and
Taiwan) received aid above the median, a probit regression finds an insignificant negative
coefficient on aid. The lack of systematic association suggests that high aid may coincide by
chance with takeoffs.
Investment and Takeoffs: The analysis examines investment as a potential indicator of
takeoffs. While investment to GDP ratios are undistinguished in some cases, no consistent
pattern emerges. A probit regression fails to establish a significant link between investment and
takeoffs, challenging the aid-financed Big Push narrative.
Human Capital Investment: Considering investment in human capital, particularly government
spending on education, the analysis finds no consistent support for the classic narrative.
Government education spending is below the median for the observed takeoffs, and a probit
regression yields a perverse negative coefficient.

Structural breaks and takeoffs

This section addresses the potential arbitrariness in defining takeoffs and introduces a more
formal method utilizing the Bai and Perron (1996, 2003) approach. The aim is to apply a
systematic procedure to identify structural breaks in the time series of per capita income,
determining the occurrence of takeoffs in a more objective manner.
Methodology: The author employs the Bai and Perron method, which endogenously determines
the number and dates of structural breaks in the log of per capita income. This method considers
the statistical significance of trends in each sub-period and establishes a more formalized
approach to identifying takeoffs. The analysis applies different minimum lengths of regime
segments for countries with varying data availability, maximizing fit and statistical significance.
Definition of Takeoff: A takeoff, in this context, is defined as a continuous sequence of regimes
featuring zero growth followed by a continuous sequence of regimes with positive growth. Two
definitions of zero and positive growth are explored: one based on estimated magnitudes and
another based on statistical significance.
Results: The method yields results for 139 countries, revealing that the hypothesis of a single
break associated with takeoff is elusive. While the takeoff hypothesis suggests only one break,
the procedure finds 2 or more breaks in 109 countries, and none of the 30 countries with only
one break meet the takeoff definition.
Zero and Positive Growth Definitions: The first definition, relying on estimated magnitudes,
identifies only one consistent takeoff—Costa Rica. The growth patterns of China, Hong Kong,
Indonesia, Singapore, and Thailand are not captured due to data limitations. A second definition
based on statistical significance introduces Costa Rica as a consistent case, along with additional
countries such as Bolivia, Brazil, and Cape Verde.
Robust Findings: Despite the diversity in takeoff definitions and the elusive nature of the
concept in the data, a consistent finding is the rarity of abrupt, large takeoffs associated with the
classic aid narrative. The analysis emphasizes the challenges in identifying robust takeoff cases
and acknowledges the impact of varying data requirements and methodological approaches.

Conclusions

The classic aid narrative

This section critically evaluates the classic aid narrative, which posits that poor countries are
trapped in poverty, requiring a substantial Big Push through increased aid and investment to
initiate a takeoff in per capita income. The narrative, influential historically and resurging in the
new millennium, is subjected to simple tests to assess its empirical validity.
Narrative's Evolution: The classic aid narrative, initially a primary justification for foreign aid,
saw diminished popularity in the market-oriented 1980s and 1990s but has regained prominence
in recent debates on foreign aid. The paper addresses this resurgence and scrutinizes the
narrative's elements through empirical analyses.
Empirical Tests:
1. Poverty Traps:
 Findings: The data rejects the presence of poverty traps, defined as zero growth
for low-income countries, in most time periods. The paper challenges the notion
that low-income nations consistently experience stagnation.
2. Divergence Between Rich and Poor Nations (1960–2002):
  Findings: While evidence of divergence between rich and poor nations exists
during 1960–2002, the lower growth of poor countries is attributed more to "bad
government" than initial income. The association challenges the idea of a
straightforward poverty trap.
3. Takeoffs:
 Findings: The concept of abrupt takeoffs receives limited support in the data.
Takeoffs are infrequent and are primarily observed in the Asian success stories.
Importantly, these takeoffs are not strongly correlated with aid or investment,
deviating from the standard Big Push narrative.
Conclusion: The empirical tests applied to the classic aid narrative yield sparse evidence in its
favor. The absence of persistent poverty traps, the nuanced relationship between growth and
initial income, and the rarity of takeoffs challenge the narrative's core tenets. The Asian success
stories, while experiencing takeoffs, do not exhibit a clear association with aid or investment.
The paper underscores the need for caution in relying on simplified narratives and highlights the
complexity of coordination failures and poverty traps in the context of economic development.
Ultimately, the empirical realities question the justification for large foreign aid programs based
on this particular narrative.