What Development Economics Is All About
Suppose you were blindfolded and airlifted abroad. After you arrive in a small town and remove the blindfold, your job is to determine the income level of the place based only on sixty seconds of observation. What would you look for? If you have traveled or lived in a developing country, you might have a head start on this assignment: Is it hot and humid? What are people wearing? Eating? How are people getting around? What do the streets and buildings look like? Do the animals look pampered? Do you see trash or trash cans? And the new smells! Most people, when exposed to living standards far below their own, want to help in some way. Economists (yes, even economists!) feel this impulse and wonder: Why are some places rich and others poor? What can be done to reduce poverty and encourage economic growth? In this chapter, we introduce development economics and describe the emergence and evolution of this field.
Evolution of development economics
Import substitution and export promotion
Inseparability of efficiency and equity
alawi is one of the poorest countries in the world. The average person living there had an annual income of $389 in 2018. That is not even a dollar a day. Even when we adjust for a low cost of living, the average Malawian lived off what in the United States would be the equivalent of around $3 a day.1
“What is the solution to Malawi’s pervasive poverty?” While it is certainly natural to ask it, this question may not be very helpful in practice. In the words of economist Thomas Sowell: “There are no solutions. There are only trade-offs.”
Like other least-developed countries (LDCs), Malawi has tried a number of different strategies to stimulate development and raise the welfare of its people.2
It made the growth of smallholder production a cornerstone of its development and poverty-alleviation strategy by focusing on improving smallholders’ access to agricultural input and output markets. Eighty-one percent of Malawi’s population is rural, and smallholders make up about 90% of the poor. Food production is a major source of livelihood for most rural households. Productivity and, in particular, fertilizer use, are low. Only 67% of agricultural households used fertilizer in 2004.3
Before 1998, Malawi relied on market price supports to transfer income to farm households. (Other African
countries continue to pay farmers above-market prices.) In recent years, fertilizer subsidies were the primary method of transferring income to rural Malawi households. Paying for farmers’ inputs is expensive and controversial. More than 50% of the Ministry of Agriculture’s budget has gone toward paying for input subsidies.4
Most recently, the country has taken a new line of attack by introducing a social cash transfer scheme (SCTS) that targets ultra-poor households (those living on less than $0.10 per day) whose members are unable to work due to disability, age, illness, or a high dependency ratio (too many people to take care of at home). Rather than specifically targeting agricultural production, like the price supports or fertilizer subsidies, cash transfers raise incomes directly, allowing households to increase consumption or to invest in production activities. The government and researchers hope these transfers will stimulate production in other ways while creating positive spillovers that benefit other households in the economy.
Field research to test the effectiveness of SCT programs is ongoing. SCT programs are being implemented throughout the continent, in Ethiopia, Ghana, Kenya, Zambia, Zimbabwe, Lesotho, and other poor countries. The United Nations Children’s Fund (UNICEF) and the UN’s Food and Agricultural Organization (FAO), in conjunction with several universities and agencies, have launched an ambitious project to document the impacts of these transfer programs on a range of outcomes, from crop production to HIV/AIDS prevention.5
Development economists are on the front line of this most recent effort, helping to design and evaluate SCT programs. On a micro level, this is a good example of the sorts of things development economists do. More generally, development economics is about sizing up the trade-offs involved in poverty alleviation and economic development more broadly. Recently, much of this work aims to rigorously assess what works and what doesn’t as part of exploring these trade-offs, which is why we dedicate chapter 2 to this topic.
WHAT IS DEVELOPMENT ECONOMICS?
Usually, a development economics class is a potpourri of special topics. It’s hard for it not to be, because economic development involves so many different things:
•It’s income growth (how can we have development without growth in countries whose per capita incomes now hover around $1–2 per day?).
•It’s welfare economics, including the study of poverty and inequality.
•It’s agricultural economics. How to make agriculture more productive is a big question in countries where most of the population—particularly the poor population—is rural and agricultural.
•It’s economic demography, the study of population growth in a world with more than 7 billion people, and population distribution in a world with more than a quarter of a billion international migrants and many more internal ones. (China alone has hundreds of millions of internal migrants.)
•It’s labor economics: education, health, conditions in the workplace.
•It’s the study of markets for goods, services, inputs, outputs, credit, and insurance, without which whole economies can grind to a standstill.
•It’s public economics, including the provision of public goods from roads and communications to utilities and waste treatment, and it’s about managing the macro economy, too.
•It’s about natural resources and the environment: energy, water, deforestation, pollution, climate change, sustainability.
What is economic development not about, you might ask?
Lurking behind this question is another—one that lies at the heart of why we wrote this book: Why is there even a field of development economics? After all, most economics departments have courses in each one of the above areas—and more.
Development economics seeks to understand the economic aspects of the development process in low-income countries. This implies that there must be something different about studying economics in low-income countries.
Clearly there is. Economic development entails far-reaching changes in the structure of economies, technologies, societies, and political systems. Development economics is the study of economies that do not fit many of the basic assumptions underpinning economic analysis in high-income countries, including well-functioning markets, perfect information, and low transaction costs. When these assumptions break down, so do the most basic welfare and policy conclusions of economics.
This book, like other development economics texts, touches on many different topics. However, its focus is on the fundamental things that distinguish rich and poor countries and the methods we use to analyze critical development economic issues. After reading and studying it, you will be familiar with the basic tool kit development economists use to do research, begin to understand what makes rich and poor countries different, and have an appreciation for the theory and practice of development economics.
THE EVOLUTION OF DEVELOPMENT ECONOMICS
Economics classes rarely spend much time on history. But the brief history of development economics is instructive. Appreciating how economists have come to understand economic development helps us
understand the various development approaches people have taken over time and how we got to the
ideas that are popular now. What economists thought
development meant at the beginnings of our field’s history is quite different from the way we see it today.
The origins of modern development economics are not found in low-income countries, but rather in relatively developed countries devastated by war.6
In the aftermath of World War II, there was a need for economic theories and policies to support the rebuilding of war-torn Europe and Japan. The United States adopted the Marshall Plan to help rebuild European economies. This was a massive program: $13 billion over four years was a lot of money back then!
In the wake of the success of the Marshall Plan, economists shifted their attention in the 1950s and 1960s from Europe to the economic problems of Africa, Asia, and Latin America. Lessons learned in Europe did not transfer easily to those settings; it quickly became clear that poor countries faced fundamentally different challenges.
Early development economists focused on income growth, often blurring the lines between growth and development. In poor countries, major structural transformations were needed to achieve growth. By comparing different countries’ growth experiences (including the past experiences of the more developed countries), economists tried to uncover the conditions that determine successful development and economic growth.
Seminal work during this early period of development economics includes Walter Rostow’s treatise on the stages of economic growth: the traditional society, the preconditions for take-off, the take-off, the drive to maturity, and the age of high mass consumption.7
Nobel laureate Simon Kuznets (whom we shall revisit later in this chapter) countered this simplistic view that all countries go through a similar linear set of stages in their economic history. He argued instead that key characteristics of today’s poor countries are fundamentally different from those of high-income countries before they developed.
The Anatomy of Growth
Economists recognized the need to understand how the growth process works. Growth is important enough to get its own chapter in this book (chapter 7). There, we’ll focus on modern growth theory, but growth models have played an important role since the start of development economics.
A simple aggregate growth model developed by Sir Roy F. Harrod and Evsey Domar became part of the basic creed of development economists in the 1950s and 1960s.8
The Harrod-Domar model’s main implication was that investment is the key driver of economic growth. It focused economists’ and policy makers’
attention on generating the savings required to support higher growth rates in poor countries. Although simplistic, this was a precursor to models used to analyze economic growth in developing countries today.
Nobel laureate W. Arthur Lewis viewed growth through a higher-resolution lens. His famed work, “Economic Development with Unlimited Supplies of Labor,” shifted attention from aggregate growth to structur...