Journal of Economic Growth

, Volume 6, Issue 2, pp 135–157 | Cite as

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

  • William Easterly


I document in this paper a puzzle thathas not received previous attention in the literature. In 1980–98,median per capita income growth in developing countries was 0.0percent, as compared to 2.5 percent in 1960–79. Yet I documentin this paper that variables that are standard in growth regressions—policieslike financial depth and real overvaluation, and initial conditionslike health, education, fertility, and infrastructure generallyimproved from 1960–79 to 1980–98. Developing countrygrowth should have increased instead of decreased according tothe standard growth regression determinants of growth. The stagnationseems to represent a disappointing outcome to the movement towardsthe ``Washington Consensus'' by developing countries. I speculatethat worldwide factors like the increase in world interest rates,the increased debt burden of developing countries, the growthslowdown in the industrial world, and skill-biased technicalchange may have contributed to the developing countries' stagnation,although I am not able to establish decisive evidence for thesehypotheses. I also document that many growth regressions aremis-specified in a way similar to the Jones (1995) critique thata stationary variable (growth) is being regressed on non-stationaryvariables like policies and initial conditions. It may be thatthe 1960–1979 period was the unusual period for LDC growth,and the 1980–98 stagnation of poor countries representsa return to the historical pattern of divergence between richand poor countries.

Economic growth policy reforms economic stagnation debt crisis 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Acemoglu, D., and F. Zilibotti. (2001). “Productivity Differences,” Quarterly Journal of Economics 115. Forthcoming.Google Scholar
  2. Aghion, P., and P. Howitt. (1998). Endogenous Growth Theory. Cambridge, MA: MIT Press.Google Scholar
  3. Alesina, A., and D. Rodrik. (1994). “Distributive Politics and Economic Growth,” Quarterly Journal of Economics 109, 465–90.Google Scholar
  4. Barro, R. J. (1998). Determinants of Economic Growth: A Cross Country Empirical Study. Cambridge, MA: MIT Press.Google Scholar
  5. Barro, R. J., and X. Sala-i-Martin. (1995). Economic Growth. New York: McGraw-Hill.Google Scholar
  6. Barro, R. J. (1991). “Economic Growth in a Cross Section of Countries,” Quarterly Journal of Economics 106, 407–443.Google Scholar
  7. Bruno, M., and W. Easterly. (1998). “Inflation Crises and Long-run Growth,” Journal of Monetary Economics 4, 3–26.Google Scholar
  8. Canning, D., and M. Fay. (1993). “The Effect of Transportation Networks on Economic Growth.” Discussion Paper Series, Columbia University, Dept. of Economics.Google Scholar
  9. Cohen, S. S., J. B. DeLong, and J. Zysman. (1999).“An E-conomy.” Scholar
  10. David, P., and G. Wright. (1999). “General Purpose Technologies and Surges in Productivity: Historical Perspectives on the Future of the ICT Revolution,” Scholar
  11. Deininger, K., and L. Squire. (1998). “New Ways of Looking at Old Issues: Inequality and Growth,” Journal of Development Economics 57, 259–287.Google Scholar
  12. Deininger, K., and P. Olinto. (2000). “Asset Destribution, Inequality, and Growth.” Working Paper No. 2375, World Bank, Development Research Group.Google Scholar
  13. Dollar, D. (1992). “Outward-oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985,” Economic Development and Cultural Change 40, 523–544.Google Scholar
  14. Durlauf, S., and D. Quah. “The New Empirics of Economic of Economic Growth.” In John Taylor and Michael Woodford (eds), Handbook of Macroeconomics. Forthcoming.Google Scholar
  15. Easterly, W. (2001). “Growth Implosions and Debt Explosions: Do Growth Slowdowns Cause Public Debt Crises?” BE Press Journals of Macroeconomics Vol. 1, Issue 1.Google Scholar
  16. Easterly, W., and R. Levine. (2001). “It's Not Factor Accumulation: Stylized Facts and Growth Models,” World Bank Economic Review. Forthcoming, 2001.Google Scholar
  17. Easterly, W., and R. Levine. (1997a). “Africa's Growth Tragedy: Policies and Ethnic Divisions,” Quarterly Journal of Economics.Google Scholar
  18. Easterly, W., and R. Levine. (1997b). “Troubles with the Neighbors: Africa's Problem, Africa's Opportunity,” Journal of African Economies 7, 120–142.Google Scholar
  19. Easterly, W., M. Kremer, L. Pritchett, and L. Summers. (1993). “Good Policy or Good Luck? Country Growth Performance and Temporary Shocks,” Journal of Monetary Economics 32, 459–483.Google Scholar
  20. Easterly, W., and S. Rebelo. (1993). “Fiscal Policy and Economic Growth: an Empirical Investigation,” Journal of Monetary Economics 32, 417–458.Google Scholar
  21. Fischer, S. (1993). “The Role of Macroeconomic Factors in Growth,” Journal of Monetary Economics XXXII, 485–511.Google Scholar
  22. Forbes, K. (2000). “A Reassessment of the Relationship Between Inequality and Growth,” American Economic Review. Forthcoming.Google Scholar
  23. Fujita, M., P. Krugman, and A. J. Venables. (1999). The Spatial Economy: Cities, Regions and International Trade. Cambridge, MA: MIT Press.Google Scholar
  24. Grossman, G. M., and E. Helpman. (1991). Innovation and Growth in the Global Economy. Cambridge, MA: MIT Press.Google Scholar
  25. Gylfason, T. (2000). “Natural Resources, Education, and Economic Development,” Working Paper No. 2594, Center for Economic Policy Research, October.Google Scholar
  26. Hall, R., and C. Jones. (1999). “Why Do Some Countries Produce So Much More Output than Others?” Quarterly Journal of Economics CXIV, 83–116.Google Scholar
  27. Jones, C. I. (1995). “Time Series Tests of Endogenous Growth Models,” Quarterly Journal of Economics 110, 495–525.Google Scholar
  28. King, R. G., and R. Levine. (1993a). “Finance and Growth: Schumpeter Might be Right,” Quarterly Journal of Economics 108, 717–737.Google Scholar
  29. King, R. G., and R. Levine. (1993b). “Finance, Entrepreneurship, and Growth: Theory and Evidence.” Journal of Monetary Economics 32, 513–542.Google Scholar
  30. Knack, S., and P. Keefer. (1995). “Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures,” Economics and Politics 7, 207–227.Google Scholar
  31. Krugman, P. (1995). “Dutch Tulips and Emerging Markets,” Foreign Affairs 74, 23–44.Google Scholar
  32. Krugman, P. R., and A. J. Venables. (1995). “Globalization and the Inequality of Nations,” Quarterly Journal of Economics 857–80.Google Scholar
  33. Levine, R., N. Loayza, and T. Beck. (1999). “Financial Intermediation and Growth: Causality and Causes.” Working Paper No. 202059, World Bank Policy Research.Google Scholar
  34. Levine, R., and S. Zervos. (1998). “Stock Markets, Banks, and Economic Growth,” American Economic Review 88, 537–58.Google Scholar
  35. Levine, R., and S. J. Zervos. (1993). “What We Have Learned about Policy and Growth from Cross-Country Regressions?” American Economic Review 83, 426–430.Google Scholar
  36. Levine, R., and D. Renelt. (1991). “Sensitivity Analysis of Cross-Country Growth Regressions.” American Economic Review XXC, 942–963.Google Scholar
  37. Mankiw, N. G., D. Romer, and D. N. Weil. (1992). “Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics 107, 407–437.Google Scholar
  38. Manzano, O., and R. Rigobón. (2000). “Resource Curse or Debt Overhang?” paper presented at MIT Energy Lab conference, November.Google Scholar
  39. Persson, T., and G. Tabellini. (1994). “Is Inequality Harmful for Growth?” American Economic Review 84, 600–621.Google Scholar
  40. Pritchett, L. (1998). “Patterns of Economic Growth: Hills, Plateaus, Mountains, and Plains,” Working Paper No. 1947, Policy Research.Google Scholar
  41. Pritchett, L. (1997). “Divergence, Big Time.” Journal of Economic Perspectives 11, 3–17.Google Scholar
  42. Quah, D. (1997). “Increasingly Weightless Economies,” Bank of England Quarterly Bulletin 37, 49–56.Google Scholar
  43. Rebelo, S. (1991). “Long Run Policy Analysis and Long Run Growth,” Journal of Political Economy 99, 500–521.Google Scholar
  44. Ritzen, J., W. Easterly, and M. Woolcock. (2000). “On Good Politicians and Bad Policies: Social Cohesion, Institutions, and Growth.” Mimeo, World Bank.Google Scholar
  45. Rodrik, D. (1999). “Where Did All the Growth Go? External Shocks, Social Conflict, and Growth Collapses.” Journal of Economic Growth 4, 385–412.Google Scholar
  46. Sachs, J., and A. Warner. (1995). “Natural Resource Abundance and Economic Growth,” Working Paper No. 5398, NBER.Google Scholar
  47. Tornell, A., and P. Lane. (1999). “The Voracity Effect,” American Economic Review 89, 22–46.Google Scholar
  48. World Bank. (2000). Global Development Finance 2000. Washington DC.Google Scholar
  49. World Bank. (2000). World Development Indicators 2000. Washington DC.Google Scholar

Copyright information

© Kluwer Academic Publishers 2001

Authors and Affiliations

  • William Easterly
    • 1
  1. 1.Washington,DC

Personalised recommendations