DEVELOPMENT ECONOMICS

Development economics emerged in the late 1940s and 1950s as a Third

World was forming from the shambles of disintegrating colonial empires.

Its pioneers were independent scholars who addressed the problem of

"underdevelopment" from respective experiences, regions and

intellectual formations. The 19th-century late industrializers, Soviet

economic planning, and the management of the British war economy were

among the historical experiences that informed their work.

The author is a policy analyst of Action for Economic Reforms, and a

lecturer at the Department of Economics, School of Social Sciences,

Ateneo de Manila University.

Development economics emerged in the late 1940s and 1950s as a Third

World was forming from the shambles of disintegrating colonial empires.

Its pioneers were independent scholars who addressed the problem of

"underdevelopment" from respective experiences, regions and

intellectual formations. The 19th-century late industrializers, Soviet

economic planning, and the management of the British war economy were

among the historical experiences that informed their work.

Development economics fell into disrepute in Western academic circles

with the rise of neoliberalism in the late 1970s. With the neoclassical

counter-revolution and the ascendancy of monetarism in the advanced

industrial countries, development economics was slowly rejected in the

South. The beleaguered discipline of development economics found itself

hounded out of economics departments, development finance institutions,

and journals as what Albert Hirschman has called "monoeconomics" spread

itself.

Renewed interest

The most immediate reason for the revival of interest in development

economics is the failure of the neoliberal Washington Consensus that

underpinned the structural adjustments programs of the Bretton Woods

Institutions. Given their focus on stabilization and static allocative

efficiency, and their deflationary bias, these "adjustment" programs

have failed to induce the kinds of structural changes associated with

development.

Interest has also been stimulated by the revisionist accounts of the

period of interventionism, which argues that the period was not the

unmitigated disaster that it has been portrayed. For most countries, it

has been seen that the much-maligned import substituting industries

were first to move toward industrialization. A closer reading of the

East Asian Tigers' history will show that in fact, the state had done

much targeted and selective intervention (and not simply lazy

liberalization) to ensure that they created global market winners.

Comeback

Development economics, the whole world over, is set to make a comeback.

Economics departments – particularly of more open-minded universities

like University of Cambridge, University of Oxford, and Columbia

University – seem to be leading the way. With the help of progressive

United Nations agencies and funding agencies, these universities have

set the stage for the rebirth of development economics.

At the top of their agenda is rectifying the mistakes of the past. It

has been argued that the culture of economics as a science has had a

devastating impact on development economics. The discipline of

economics has enshrined the "keep it simple, stupid" (KISS) principle

as an overarching tenet, imbibed in many purely orthodox graduate

schools. This principle demands simple explanations and universally

valid propositions. This has led to fallacies with significant

deleterious consequences for both theory and policy.

First Fallacy: underdevelopment has but a single cause

It has been noted that the fundamental reason for the many sudden

changes in the dominant paradigm in development economics has been the

inherently misguided search for a single-cause, and hence a

single-remedy, theory of development. The argumentation has been

structured by the KISS principle and has remained fundamentally the

same: underdevelopment is due to constraint X; loosen X, and

development will be the inevitable result. Indeed, this is rooted in a

rather simplistic view of the mechanism of development and of the

system in which it takes place. History, however, has shown that

development is highly nonlinear and multifaceted. Relaxing a particular

X might not automatically lead to development, but rather to the

emergence of a sequence of other binding constraints. Furthermore, that

there is a unique binding constraint X that applies to all countries at

all points of their trajectory towards development is highly incredible

and suspect.

Second Fallacy: development is a log-linear process

In a popular model of economic growth, the world is assumed to have a

single production function that is dependent on supplies of inputs.

Country deviations from this production function are taken to represent

productivity differences, the sources of which are left undefined. The

rate of growth of total output becomes a function of the rate of change

of the physical inputs, and the rate of growth of per capita output

becomes a function of the rate of change of the capital-labor ratio,

the rate of change of the per capita endowment of natural resources,

and the rate of change of the residual. This residual is usually

assumed to be a function of the X factor of the day – openness, degree

of development of capitalist institutions, availability of human

capital, democracy, corruption, or the development of the political

institutions.

This approach has several erroneous implications. The worst implication

is that initial conditions do not matter, as any country that follows

the model's policy prescriptions is destined to grow. This in turn

implies that universal policy prescriptions apply to all countries at

all times, regardless of their current state of socio institutional and

economic development, political structure, and policy objectives.

Third fallacy: free market romanticism

Barbara Harriss-White puts it very succinctly: Conceptions of "the

market" used by certain economic historians and in much of development

policy discourse are romantic in the sense that have imaginative

vision, extravagant wildness, fictitiousness, and a remoteness from

experience. They fail to recognize the theoretical limitations to the

neoclassical notion of the market or the practical incapacity of actual

existing markets to decently structure social life.

In real, existing markets, there are no impersonal abstract mechanisms

at work, neutral among competing claims. Case studies have shown many

ways in which "actually existing markets" may be embedded in various

institutions that, if taken into consideration, should greatly affect

and alter policy design.

Some conclusions

" to conceive of economic phenomena as embedded is not to renounce

theory, certainly not. It is to start theorizing differently." (Caille,

1994)

Countries face very distinct and unique problems of underdevelopment.

Coupling these idiosyncratic challenges with the distinct local

context, it is clear that solutions to the problems of underdevelopment

will necessarily have to be varied over time and space.

While markets are inevitable, the developmental role of the market is necessarily ambivalent.

On one hand, markets are associated with increases in production,

improvements in complex coordination and decentralization of power to a

point. On the other hand, they cannot be as competitive as theory

predicts and their efficiency is impossible to measure. Their

disciplines can be immiserizing, and while they create livelihoods,

markets cannot ensure them or limit exploitation. They require vast

amounts of information to operate effectively, and they need strong

regulatory mechanisms rather than participation in order to curb abuse.

In a large way, this implies that the new development economics cannot

be one that will overly generalize. Development policy requires a more

complex understanding of social systems, combining economic, social,

cultural, and political institutions and their changing interactions

over time; the interventions might have to be multipronged; that what

is good for one phase of the development process may be bad for the

next phase, that there are certain irreversibilities in the development

process that create path dependence, and as a result, that policy

prescriptions for a given country at a given time must be anchored in

an understanding of its situation at that point in time and of how it

got there.