The postwar project: Economic development in practice

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The postwar project Economic development in
practice

• IS290/IS190
• ICT4D Context, Strategies, and Impacts

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Fallacies in development theory

• Underdevelopment has a single cause
• A single criterion suffices for evaluating
  development performance
• Development is a log-linear process

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Fallacy 1 Underdevelopment has but a single
cause

• . . .or panaceas that failed (Easterly)
• Classical theorists Adam Smith, Karl Marx,
  Joseph Schumpeter had multidimensional historical
  views of development resources, technical
  knowledge, social and institutional structures,
  diversity of economy, political structures,
  culture, etc.
• Mainstream postwar development theory tended to
  be mono causal and suggest uni-dimensional
  solutions

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X-factor as the magic bullet

• Underdevelopment is due to constraint X if
  loosen X, then development will be inevitable
  result. Xcapital, skill, technology, etc.
• Each may have limited applicability in
  particular places at particular times, but not
  necessary and sufficient for development

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X physical capital, 1940-70

• Investment is key to growth capital
  fundamentalism
• Soviet model of growth continuing investment in
  capital intensive industry, infrastructure
• Memories of Marshall plan reconstruction
• Bretton Woods institutions World Bank (IBRD),
  International Monetary Fund (IMF), postwar
  bilateral foreign assistance programs all based
  on this assumption

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Digression on growth theory I

• Harrod-Domar model
• Growth depends on the quantity of capital
  labor investment leads to capital accumulation,
  which generates economic growth (Keynesian.)
• Developing economies have plentiful labor but
  scarce physical capital, and low incomes mean low
  savings/investment.
• Policy implication economic growth depends on
  policies to increase saving and investment
• Assumes fixed capital-output, capital-labor ratios

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Growth poles as spatial counterpart

• ..belief in the power of heavy industrial
  investment to radically alter the structure of
  the economy. . . It was argued that sufficient
  capital could produce instant modernization.
• Lisa Peattie Planning Rethinking Ciudad Guyana
  1987
• Big ticket infrastructure modern steel mills,
  huge hydroelectric projects. Confidence that
  leading sectors would pull rest of economy
  along in a march to societal progress.

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X entrepreneurship (1958-65)

• Influenced by Schumpeterian theory
• Deficiency of entrepreneurship need private
  sector industrialists to lead growth
• Creation of International Finance Corp (IFC) as
  part of World Bank Group
• Government seeks to influence supply of
  entrepreneurship or to substitute for
  entrepreneurship

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Entrepreneurship private investment

• IFC, founded 1956 Our mission is to promote
  sustainable private sector investment in
  developing countries, helping to reduce poverty
  and improve people's lives.
• Products innovative financial arrangements such
  as loans, equity and quasi-equity investments,
  guarantees and stand-by finance, etc.

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Digression on growth theory II

• Neoclassical (Solow) growth model
• Key addition Capital subject to diminishing
  returns
• Long run growth via increase in productivity of
  labornot capital accumulation
• Difference between capital intensity (K/L) and
  technology (output per worker hour)
• Solow (1956, 1957) calculated that the residual
  accounted for four-fifths of US economic growth
• Growth rate depends on technological innovation
  and so is exogenous (outside model)

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X incorrect relative prices (1970-80)

• ILO observation of growth and industrialization
  with high unemployment and inequality
• Economic dualism capital intensive modern
  industry v. low productivity, small firms
• Belief that relative factor prices did not
  reflect relative economic scarcity subsidies gt
  capital under priced, labor overpriced relative
  to availability gt inappropriate technology
• Solution favor labor intensive prodn via import
  substitution, raise tariffs for capital intensive

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X international trade (1980- )

• Inefficiencies of government sponsored
  industrialization (protection, subsidies, etc.)
• International trade promoted as substitute for
  inadequate domestic demand removing barriers to
  trade in commodities will automatically gt rapid
  export-led growth
• Comparative advantage plus domestic and trade
  liberalization as sufficient (panacea?)

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X hyperactive government (1980-96)

• Government is not the solution to development,
  its the problem it corrupt distorts market
  incentives
• Solution is to minimize role of government in
  domestic (as well as international) markets
• gt Washington consensus

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Commentary

• Growth theory technology is exogenous
• Microeconomics theory of static resource
  allocation
• Assumptions for market equilibrium least
  applicable in developing economies where factors
  are not mobile, information is not perfect,
  institutions poorly developed, etc.
• Market equilibrium depends on initial
  distribution of wealth if that is not optimal
  them wont achieve welfare maximization

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Digression on growth theory III

• New growth theory (1980s)
• Technological change endogenous to model
• Increasing (not diminishing) returns to capital
  investment via virtual cycles of innovation and
  human capital improvements spill over
• Learning by doing and economies of scale
• Policy RD and/or human capital investment

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X human capital (1988- )

• Low human capital endowments as obstacle
• New growth theory human capital and knowledge
  magnify productivity of capital raw labor
• Multiple growth trajectories high growth, high
  factor productivity, econ of scale when have high
  levels of human capital and knowledge
• gt Brain drain and underemployment due to lack
  of demand, complementary opportunities

a
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The limits of growth theory?

• Emerging consensus that new growth theory no more
  successful than neoclassical growth theory in
  explaining income divergence btwn developed and
  developing economies. (Both predict LT income
  convergence. . .)
• Why? Econ factors institutional arrangements,
  internal market barriers, trade barriers, etc.
• What about other factors bad govts,
  polarization due to ethnic conflict and
  inequality excessive red tape, black markets,
  high levels of debt, inflation, etc.

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X ineffective government (1997- )

• Reevaluation of optimal role of government
• 1. East Asian successes govt role in shift from
  import-subs to export promotion
• 2. Backlash against neo-liberalism in advanced
  economies focus on corruption
• 3. Mixed success of market reforms in 1980s lead
  institutions like WB to see need for capable,
  committed governments to reform

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Fallacy 2 Single criterion suffices for
evaluating development performance

• GNP per capita only national potential for
  improving welfare of majority, not actual
• Need for multidimensional criteria such as Human
  Development Index (UNDP) that involve
  distribution measures and other indicators of
  human welfare
• Ideal battery of disaggregated performance
  indicators to index national welfare evolution

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Fallacy 3 Development is a log-linear process

• Solow a single unique production function that
  characterizes all countries, based on supply of
  inputs, capital, labor, and natural resources
• Growth of total output is function of rate of
  change of physical inputs rate of growth of per
  capital output is function of rate of change of
  capital-labor ratio, natural resources, and
  residual (technological change)
• Ignores initial conditions history, levels,
  path dependence

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Alternative propositions

• Development process is highly nonlinear
• Development trajectories not unique
• Initial conditions shape subsequent devel.
• Development trajectories can be altered via
  policy, they are malleable
• Economic development is a highly multifaceted,
  non-linear, path-dependent, dynamic process that
  involves shifting interactions between different
  aspects of development

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Additional resources

• Gerald Meier and Joseph Stiglitz, eds. Frontiers
  of Development Economics (2001)
• Lisa Peattie Planning Rethinking Ciudad Guyana
  (1987)
• Jane Jacobs Cities and the Wealth of Nations
  Principles of Economic Life(1984)