Reviving development economics

The author is a professor (on leave) at the UP School of Economics. His currently a consultant for United Nations Development Programme in New York.

There are three main factors that caused the decline of development economics, especially during the 1980s and 1990s. These are:

  1. The hegemony of the neoclassical noninterventionist and
    monetarist/rational expectations schools in mainstream economics during
    the 1970s and 1980s succeeded in removing from the mainstream
    literature developmental and interventionist approaches to economics.
  2. The core of development economic theories did not employ the
    “elegant” rational, optimizing and comparative static framework and
    methodology of neoclassical economics.
  3. A third reason which we should not ignore is the entry in the
    1960s and 1970s of so many other topics in the realm of development
    economics, which merely duplicated existing fields in economics but
    applying them in a “Third World” context. Areas and topics in the
    fiscal, monetary, exchange rate arenas, labor economics, international
    trade, agricultural economics, education and social sector (population,
    health, etc.). were all included as part of .development economics.
    This “borrow from mainstream theory” and “apply to a Third World
    context” scheme, plus the lack of an elegant neoclassical model,
    naturally relegated development economics to a status of “soft”
    economics indistinguishable from sociology, psychology and other social
    sciences, and unbefitting of true “hard-core” scientific and analytical
    (neoclassical) economics.

Based on the above factors, it is clear that the revival of development
economics should be outside the paradigm and methodology set by the
dominant mainstream economics and towards new paradigms and new
methodologies so much needed in modern economics. I would not be so
radical as to advocate a complete cutoff from all mainstream
practitioners of economics, and a rejection of all their theories and
methodologies. There are many things to learn from the works of good
economists (of different ideologies) who have left some imprint in
mainstream economics. Keynes, Hayek, Tobin, and the more modern (and
therefore more controversial) economists like Oliver Williamson, Mancur
Olson, Amartya, Sen. Douglas North, Joseph Stiglitz and Dani Rodrik.

Let me set down some prerequisites of the new development economics.
Many of the writers of the old development economics had a historical
context and took into consideration the institutions, socio-cultural
values and practices and governance structures within which their
economic model or theories were situated.
However, these theories were presented in the old development economics
literature in a neoclassical fashion: as timeless, static, a historical
theories not situated in a particular historical context and
environment.

One can, of course, kill development theories easily if they are so
general as to apply to all cases regardless of institutions, setting,
historical environment and the like.

The danger that any new approach must guard against is that of
generalizing too much. When we say that a developmental state is the
best, we must focus on the interventions but definitely not ignore (as
the neoclassicals do) the institutional, political, social, values and
governance factors in that historical place and time, which may or may
not allow the development strategy to succeed.

It would be a big boost to the new development economics if the
economics is blended in with the social, cultural, political and
institutional setting and environment, so that the possibilities for
change and development are clearly defined. In this respect, we need to
interact with political science, sociology, anthropology, psychology,
and the legal profession.

A corollary to this is that we shouldn’t fall into the neoclassical
trap of distinguishing markets with everything else, so that we become
anti-market in the real sense of not wanting to improve the
commodities, labor and capital markets of Third World countries. Thus
we see some of us resisting China’s or Vietnam’s use of better economic
incentives on the grounds that they are “market” devices.

As Polanyi said a long time ago, the market system cannot exist in a
vacuum. The quality of the market is only as good as the quality of the
institutions and governance structures wherein it is situated and
wherein it is guided.

A good occurrence in modern mainstream economic theory is that at long
last, it has caught up with what people in the streets long knew – that
markets are imperfect and that markets often fail to distribute
resources efficiently and fairly. This would be obvious in the more
modern studies on the pharmaceutical and drugs markets, the labor
markets, the financial markets (especially after the Asian crisis), and
environmental protection. One can include all types of markets – from
food to education to housing to futures markets. It is easy to find
market imperfections in all these markets, and to show these
imperfections has become the rule rather than the exception. But it is
rarely said that the ability to deal with these problems rest with the
quality of institutions and governance structures (which includes
information dissemination, quality control, fair arbitration,
enforcement of contracts, proper punishment and the like).

It is inherent for the workings of markets to include interventions and
threats of interventions. Ensuring the scales of the wet market are not
biased, punishing suppliers who cheat and sell inferior products,
consumer group formations and watchdogs, all these are proper
interventions in the market and actually determine the quality of the
market.
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On a more macro level, history has confirmed the theories of great
economists like Marx and Keynes who said that the market system by
itself does not automatically bring “equilibrium” and “full employment.”
In fact, uncertainty, changing moods, and varying confidence levels
bring to the market a lot of volatility and instability. And world
markets are often the ones that create these volatility and
instability, as proven by the East Asian crisis and all other previous
economic and financial crises.

To lift demand and confidence in the system, the correct intervention
by the state is required. Also required are strong conflict management
capabilities and institutions for social insurance and safety nets so
that the system – when beset by crisis – will not descend into chaos
and anarchy and produce extreme human suffering. Are the institutions
and governance structures capable of delivering these? These are
perhaps more basic questions before the identification of economic
policies can be tackled.

Going more to the global setting, most practical people, including the
more enlightened international trade economists, accept the fact that
export markets will offer more advantages if one goes into higher
value-added and higher technology products (even promotion of
agricultural exports entail a lot of biotechnology and productivity
enhancement). This requires critical directing of the export market
(learning by doing) and promotion of research and development.

Again we should not fall into the neoclassical trap of prescribing
exclusive concentration either on export markets or the domestic
market. The two are important components of the economy. Export
receipts may be vital especially for Third World countries that are
import dependent and have high current account deficits due to the lack
of capital goods and intermediate sectors. Financing foreign exchange
requirements via export receipts would be better than financing them by
short-term debts or by multilateral loans with tons of
conditionalities. At the same time, one sees the folly of relying only
on export markets and neglecting the domestic market, as is obvious in
the current trend of slowing world exports and possible world
recession. We should, therefore, be at ease with the South Korean
miracle of promoting key exports while, at the same time, protecting
and enhancing the domestic market and economy.

On a long-term basis, access to best practices and technology transfer
requires some knowledge and experience with key products sold in the
international markets. (The modern economic histories of Japan, Taiwan
and South Korea attest to this.) Again here, the level and the quality
of institutions and governance structures determine whether the
directing and guidance of the export and domestic markets would be
successful.

Third World nations’ ability to benefit from the export and
international markets depends on the international world trade setting.
Unfortunately, however, this is dominated by developed countries.
Attempts of Third World countries to participate fully and benefit from
international trade (and not to be adversely affected by it) becomes a
struggle with international institutions such as the World Trade
Organization multilateral agencies and the developed countries’
hypocritical policies of protection for us and openness for you.

Finally, the East Asian crisis has proven conclusively that capital
account liberalization, particularly to short-term flows, is akin to
opening your home to drug pushers. One need not argue whether we should
supervise or regulate them (akin to the financial supervision and
regulation strategy of the International Monetary Fund) or just ban
them outright. But again, for the unfortunate countries that have
unwittingly opened up their capital accounts (such as the Philippines,
Argentina, Russia), it would again depend on their institutions,
governance structures and political will on whether they can reimpose
controls and deal with potential vengeance from the multilateral
institutions and developed nations, or whether they would need regional
and international efforts to transform the global financial structure.

Given these views of markets in a historical and institutional setting
(from the micro, macro and global perspectives), intervention,
direction and guidance of markets become inherent in their efficient
workings and operations. Nonintervention in markets can only have
meaning in the most anarchic and chaotic sense. But the quality and
soundness of these markets and related institutions (and their
possibilities of contributing to economic development) depend
critically on the quality of social, political and cultural
institutions and governance structures.

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