Volume 2, No. 5, May 2020
Editor: Rashed Rahman
S. M. Naseem
Development Economics (DE) – after years of being eclipsed by the neo-liberal Washington Consensus – is on the cusp of a revival. After having lived a ghettoed existence in the shadow of modern economics during the first two decades of post-WWII, it acquired its own identity in the wake of the liberation of the colonised lands of Asia, Africa and Latin America. It focused on the structural problems of developing societies that were of little interest to mainstream economics, which assumed the non-existence of such rigidities and imperfections.
The model of perfect competition and laissez-faire espoused by classical economists led by Adam Smith, David Ricardo and Thomas Malthus emphasised the self-correcting nature of the capitalist system and the supremacy of markets, which obviated the need for state intervention in economic affairs and favoured a minimalist role for the state. This model was coming under increasing attack in developed capitalist economies due to the frequent recurrence of boom-bust cycles in economic activity, accompanied by overproduction and excess capacity on the one hand and unemployment and lack of effective demand on the other. Karl Marx, while sharing – and reconstructing – the labour theory of value and other tenets of classical economists, pointed out the inherent contradictions of the capitalist system and predicted its inevitable doom, without pronouncing a definite date for its demise. By the mid-twentieth century, imperfect competition and the rise of monopoly and monopolistic competition were highlighted in the seminal works of Joan Robinson and Edward Chamberlin as the reasons for suboptimal performance and market failure in capitalist economies, which required state intervention through counter-cyclical public investment policies.
DE, inspired by Keynesian economics in the wake of the Great Depression and the New Deal on the one hand and the October Revolution and central planning in the former Soviet Union on the other, assigned the state a central role in the social and economic transformation of developing countries. Initially, most developing countries focused on GDP growth with a diversified industrial base. Aided by back-of-the-envelope calculations of the Harrod-Domar (H-D) model, which was as much of a rage in the 1950s and 1960s as randomised control trials (RCTs – elaborated below) are now, the practitioners of DE developed elaborate plans for economic growth and infrastructure development.
In its humble beginnings, DE nuanced the basic H-D model – which was formulated largely in the developed country context – and extended it in several directions, including sectoral disaggregation and an open economy, among others. However, the overenthusiasm about growth – or ‘growthmanship’ – led to the neglect of other correlates of development and the emergence of a ‘growth without development’ syndrome. The most glaring and cavalier inattention was that accorded to widespread poverty, which showed an alarming increase, often despite rapid growth in many developing countries. Poverty alleviation thus became the most urgent concern of DE since the 1970s and continues to do so – lamentably, more than half a century later.
This year’s award of the Nobel Prize in Economics to Abhijit Banerjee and Esther Duflo, along with Michael Kremer – notable for breaking many previous canons – has served to bring back the focus of DE to poverty alleviation, generating a lively debate on the best way to achieve this elusive goal in terms of theory, strategy, policy and methodology. Unlike previous winners in its 50-year history – mostly older white males – the 2019 Economics laureates have much more diverse characteristics than their predecessors, in terms of age (Duflo being the youngest – although second only to Malala, if all categories are included), gender (Duflo being only the second female laureate in economics) and colour (Banerjee being the third non-white Nobel laureate in Economics, after Sir Arthur Lewis, a West Indian economist regarded as a founding father of DE, and Professor Amartya Sen, a renowned Indian economist, who, like Banerjee, received his early economics education in Presidency College, Kolkata). Duflo and Banerjee are also the first married couple to receive the Economics Nobel.
The Nobel Prize in Economics establishment has often been criticised for its gender and ideological biases and, specifically, for the grave and inexcusable failure to recognize Joan Robinson, one of the greatest economists of the past century, during her lifetime. Another outstanding female economist who arguably missed out due to her early demise seven years ago is Alice Amsden, often called DE’s last giant, in recognition of her seminal work on the East Asian miracle, entitled Asia’s Next Giant. Her work radically challenged the neo-liberal claim that the East Asian tigers owed their growth resurgence to the policies pedalled under the umbrella of the Washington Consensus. The award of the Nobel to Duflo this year may be seen as poetic justice, since Duflo now occupies a chair in DE at MIT, as did Amsden at the time of her death.
The Nobel Committee awarded the 2019 Prize collectively to the trio of Banerjee, Duflo and Kremer “for their experimental approach to alleviating global poverty”. Their collaboration, spanning almost two decades, unfolded under the auspices of J-PAL, the Abdul Latif Jameel Poverty Alleviation Lab at MIT, created by an endowment funded by a Saudi philanthropist after whom it is named. According to the latest data available on J-PAL’s website it has undertaken almost a thousand completed and ongoing RCTs in 80 countries, concentrated largely in India and Nigeria. J-PAL has clearly been instrumental in influencing the shift in giving DE a more empirical tilt toward RCTs. The central theme of their work has been poverty alleviation and the choice of policy measures that would prove most effective, given the limited resources available to achieve this objective.
The DE profession has been divided on how best to reduce the alarmingly large number of people falling below any moderately reasonable poverty line, an exercise on which the profession has spent – and continues to spend – an unduly large amount of time, energy and resources, without making a significant dent in poverty, except in a few countries such as China, whose poverty alleviation strategy was uniquely different from the rest and politically un-replicable in most developing countries.
The founding fathers of DE, especially Professor Arthur Lewis, were mainly interested in finding out how these countries could transform their economies by effecting a structural change through shifting the surplus labour (defined as that having zero marginal productivity) in the low-productivity agricultural sector to that in the high-productivity industrial sector, which would raise the average per capita income and, as a corollary, reduce the level of poverty. However, this process – which was based on many untested assumptions and discounted many institutional impediments – failed to materialise and high growth remained a mirage. Even in countries where growth was robust, it failed to ‘trickle down’ to the poor and, instead, manifested itself in increased inequality, rather than reduced poverty.
The first generation of pioneers of development economics were preoccupied with the macro aspects of development with the most pervasive concern being the relative role of the market and the state in economic development. The battle lines were drawn between those emphasising ‘market failure’ and ‘government failure’, with both sides marshalling evidence to prove their point. This rather inconclusive and often arcane debate often led to the political economy discourses of the country’s institutional structure requiring the use of multi-disciplinary approaches, which often proved to be more intractable than the economic factors.
In the initial phase of DE, much reliance was placed on foreign aid to boost growth in the less developed economies by supplementing the low level of domestic savings and by transfer of technology. However, more often than not, foreign aid produced a backlash, both from donors and recipients, as it often turned out to be a perverse transfer of resources from the poor in rich countries to the rich in poor countries. With the decline in multilateral assistance in the 1980s in the aftermath of the ‘oil shocks’, developing countries were forced to rely on high-interest foreign loans from private banks and other financial institutions, which led to reduced fiscal space and low growth stimulus, weakening the pace of development.
As a sharp deterioration in the domestic and external imbalances ensued, many developing countries started facing structural adjustment problems and had to resort to IMF and World Bank borrowing for stabilising their economies. This involved undertaking draconian austerity measures embedded in the Washington Consensus to compress domestic expenditures, whose burden fell predominantly on the poor. The state was to take a back seat in driving the economy in the wake of a presumption of ‘government failure’, upending the earlier concerns about ‘market failure’, which the pioneers of DE argued was one of its main raisons d’etre. But the neo-liberal assault on DE failed to prevent poverty alleviation from being on its development agenda. However, the rather puny poverty alleviation tail could hardly wag even an emaciated development dog.
The following telling array of numbers puts the poverty predicament in perspective and highlights its grotesque gravity. Even at $ 1.25 a day, the incredibly low poverty line often used by international agencies, the world poor’s count is over one billion (the so-called ‘bottom billion’). Nearly half of the world’s population — more than three billion people — live on less than $ 2.50 a day, while 80 percent of the world population lives on less than $ 10 a day. Oxfam estimates that it would take $ 60 billion annually to end extreme global poverty – that is less than a quarter the income of the top 100 richest billionaires.
Having caused immense suffering to the world’s poor through their structural adjustment policies and programmes, the neo-liberal agenda was window-dressed with a ‘human face’, depriving the developing countries of one to two ‘lost decades’ of development and causing a severe setback to the nascent discipline of DE. Left to their own devices, many developing countries tried to ‘catch up’ with the developed world by participating more actively in the global economy and by following the path of the East Asian economies who chose to ignore the Washington Consensus and took their destinies into their own hands.
(to be continued)