Development Economics

A Critical Introduction

Shahrukh Rafi Khan

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351848916
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Following the 2007–2009 financial and economic crises, there has been an unprecedented demand among economics students for an alternative approach, which offers a historical, institutional and multidisciplinary treatment of the discipline. Economic development lends itself ideally to meet this demand, yet most undergraduate textbooks do not reflect this.

This book will fill this gap, presenting all the core material needed to teach development economics in a one semester course, while also addressing the need for a new economics and offering flexibility to instructors. Rather than taking the typical approach of organizing by topic, the book uses theories and debates to guide its structure. This will allow students to see different perspectives on key development questions, and therefore to understand more fully the contested nature of many key areas of development economics.

The book can be used as a standalone textbook on development economics, or to accompany a more traditional text.

PART I

Background

1

INTRODUCTION

Textbooks generally do not make the distinction between the terms development economics and economic development and, more importantly, between development economics and the much broader term, development. Furthermore, many mainstream economists even doubt the validity and relevance of a field called “development economics”. A case is made in this introduction for development economics to be taught as a separate field in economics. This hinges importantly on the validity of an “alternative approaches” perspective adopted for this textbook.¹

This introduction will start with a definition of development economics, what it is about and how it is distinct from economic development or development. Following that, a case against and for the field is briefly discussed. In making a case for development economics, it becomes necessary to take on additional tasks. It becomes necessary to distinguish paradigm and approaches (the term used in this textbook) and explore method in development economics. The latter task is necessary because doing so is an important way of distinguishing the mainstream neoclassical approach from alternative heterodox approaches.² Subsequently, some key terms and concepts that are central to distinguishing alternative approaches are identified.

The subject of study in this textbook is nation states and many terms have been used and are still used in the literature to refer to them. The different ways of referring to nations are reviewed and a case is made for an income-based reference that is neutral and yet still substantive. Having covered the necessary background, the alternative approaches are then introduced. Before the summary and conclusions, a section is devoted to differentiating approaches conceptually and in terms of the method utilized.

What is development economics?

Development economics is a reference to the field and its concern or subject matter is economic development.³ Development economics is defined for this textbook as the structural transformation of an economy such that it yields economic growth or the potential for sustained well-being or prosperity for the society in question (see below). Economic growth is defined as the percentage increase in per capita gross national product (GNP) or gross domestic product (GDP) over a specified time period.⁴

One important classification of countries is based on the level of real per capita GDP attained (see others below).⁵ Low and low middle income countries (L/LMICs) are the focus of attention in this textbook. As indicated in the preface, middle income countries (MICs) are viewed as those that have already attained phases of catch-up growth and face a different set of challenges i.e. to sustain growth and not regress. Catch-up happens when income levels of L/LMICs start to converge with HICs (high income countries). This happens if they can sustain per capita GDP growth rates of 7 percent or more for several decades, and countries in this category, such as China and more recently India, are viewed as being part of the convergence club. Most LICs diverge from HICs average income levels and are part of the much larger divergence club.⁶

Catch-up or convergence occurs from high economic growth lasting several decades because it can lead to a several fold doubling of per capita GDP.⁷ Compounding and “the rule of 72” explain this. Take the growth of any variable, in this case the per capita gross domestic product (PCGDP) and divide it into 72, and this explains how long it would take the variable to double. Thus, if the per capita GDP is growing at 7 percent, it doubles in about 10 years. If it grows at an average of 10 percent, it takes only about 7 years for the doubling. This is how convergence to the income level of HICs can happen due to catch-up growth in economies that start with a low base. China started as a LIC in the late 1970s and due to several decades of over 10 percent average PCGDP growth rate, it is now ranked comfortably in the middle income category.⁸

Of course, once economies catch up with global leaders, a slow-down, as witnessed in China, is inevitable since the relatively easy part of structural transformation, such as for example organizing and managing the economy to build the requisite infrastructure or for attaining the first phase of industrialization, has been completed.⁹ This is why mature economies like the United States are unlikely to clock very high growth rates, and growth rates of up to 4 percent are considered exceptional. Attaining such a growth rate would require widely diffused technological innovations that enhance labor productivity. This is difficult to attain for mature economies that are the technological leaders and on the cutting edge while countries attempting catch-up growth already have a set of “on the shelf” technologies they can get access to.

The word potential was deliberately used and italicized in the definition of economic development above because while with catch-up growth the potential may be there to yield sustained well-being for all, in practice the fruits of economic development may remain concentrated among the wealthy in society who have the political power to appropriate the gains of economic growth. Sensitivity to this aspect of economic development is wide-ranging across the different approaches, but it has been especially highlighted by the political economy of development approach.

Alternative approaches privilege different mechanisms for and different kinds of structural transformation that can yield catch-up growth. The social, political and ecological impacts of economic growth may undermine sustained prosperity even if it is well distributed. In this regard, economic development needs to be distinguished from political, social or human, ecological and other forms of development which contribute to ensuring diffused and sustained well-being. This multi-dimensionality is captured by the terms development or sustainable development.¹⁰ Before turning to a review of key concepts for identifying approaches and the methods they utilize, a case needs to be made for the existence of development economics as a separate field in economics.

Is “development economics” really a field?

Case against

The case against development economics being taught as a separate field from the vantage point of mainstream or neoclassical economics is as follows: The use of the scientific method (see below) generates hypotheses which, if not falsified, apply across the board to all human behavior. Since “economistic” human behavior is viewed by mainstream economists to be universally the same (utility and profit maximization in consumption and production respectively), the same economics should apply across the board. The focus should be on the optimal allocation of resources and hence efficiency as evident from theories of consumer and producer behavior.

Another possible criticism in a similar vein is that development economics is at best a conglomeration of topics that represent the application of insights from different fields in mainstream economics to the problems of L/LMICs, and as such there is no justification for economic development as a separate field i.e. it is not a field like monetary economics or international trade that has coherence and its own internal logic.

Case for: different initial and current conditions in L/LMICs

L/LMICs faced vastly different initial conditions including colonialism. Further, they face very different current conditions. Chapter 3 documents the commonalities across L/LMICs and also key differences. There are also other common structural conditions pertaining to L/LMIC economies that heterodox approaches argue result in the limited relevance of the direct application of the neoclassical or Keynesian models to redress their economic development problems.

Some of these structural commonalities identified in particular by developmentalists and structuralists (see below) are market segmentation and dualism; endemic market failures; missing markets; asymmetrical or missing information; high risk and uncertainty due to missing information paralyzing economic activity; threshold effects (possibilities of multiple equilibrium); bottlenecks resulting from poor infrastructure as a major source of supply rigidities; labor market failures and various kinds of unemployment; and endemic product market failures. These approaches argue that these structural commonalities require a different kind of theorization.

While there may be validity to this contention, mainstream economists may also validly argue that their method and tools are flexible enough to model and theorize for different initial and current conditions. Heterodox scholars however argue that even if this is the case there are nonetheless serious limitations to mainstream economics, and a case for heterodox approaches emerges from the debate on method, discussed next.

Paradigms, approaches and method in development economics

The word approach has been deliberately used since it may come as close as the social sciences get to a paradigm as framed by Kuhn (1962).¹¹ Using this framework, economists who speak the same language, share common values and beliefs, ask similar research questions, utilize the same tool kit and have a consensus on the body of tested or secure knowledge can be viewed as operating within the same “paradigm”. One can think of paradigm broadly as a world view that in economics is driven by ideology.

Socialists have a world view that rejects private ownership of the means of production (like land and capital) because by virtue of private ownership and market transactions, capital, they believe, exploits labor. In principle they support a planned economy to avoid such exploitation and ensure basic needs are met for all. Capitalists have an alternative world view that privileges individual liberty, and in their view private ownership of the means of production and market transactions ensure this and also ensure efficiency.¹²

The use of the term paradigm by Kuhn was used to show how a scientific revolution (paradigm change) can occur within a community of scientists. The scientific method is commonly accepted as the way of shaking the consensus of secure knowledge and the move to a new paradigm. As will be made clear below, the application of this methodological practice in economics is challenged on several grounds. Furthermore, even if that were not an issue, heterodox scholars are not persuaded that the mainstream approach is adequate to capture the multi-dimensional complexity that economic development represents.

Following on from this, as indicated earlier, method encapsulates many ways in which the mainstream approach differs from the heterodox approaches and so it has been elaborated on in some detail. As alluded to earlier, mainstream economists, including mainstream practitioners of development economics, purport to use the scientific or deductive method and practice positive economics (free of value judgments). For example, mainstream practitioners of such positive economics argue that their concern is only with testing hypotheses, such as whether a carbon tax would reduce carbon emissions and by how much, and not with advocating whether or not such a tax per se should be imposed. The latter position they believe to be a normative one and beyond the realm of science.

Thus the scientific method is used for theorizing in mainstream economics. Theorizing involves logically identifying the causal relationship between key economic variables like prices and quantities while abstracting from others not likely to have a...