After a century of economic thought we still wrestle to bridge the development gap.
In his 40-min lecture posted on the Center for Global Development, Owen Barder makes a new and compelling case about how we should think about development. His talked, titled “What is Development” presents us with 2 key ideas that should shift the way we think about foreign engagement in developing economies.
- The economy consists of a many people, products, firms and institutions which means it behaves as a complex adaptive system. Hence, development is not a series of individual successes. Instead it is the emergence of self-organizing complexity from the system as a whole.
- There are 7 key policy implications from this idea that change how we engage with issues of development and that explain why some economies ‘take-off’ while others stagnate.
- It’s capital, stupid: Developed after the second world war, the Harrod-Domar growth model argued that the economy is the sum of labor and capital inputs. Since most developing countries seemed to have a surplus of labor, they were most likely capital constrained.
- It’s savings, stupid: Walter Rostow’s model of economic growth spoke of the virtuous cycle of investment, growth and savings. He argued that if an ‘investment gap’ could be bridged by aid, then the virtuous cycle would lead to rapid growth. This has informed much of traditional foreign aid policy.
- It’s technology, stupid: The prevalent Solow model of growth mentions ‘technology’ as the exogenous component that drives growth. The idea has received merit thanks to the telecom revolution in Asia and Africa. However, what constitutes the right technology is hard to define and Solow himself tends to avoid specifics on this bucket.
- It’s policies, stupid: The IMF and World Bank have set up loan programs on the thesis that government is the ingredient that prevents economies from living up to their theoretical potential. This has created the Washington Consensus which is a series of policy reforms often required from countries receiving aid and loans.
- It’s institutions, stupid: In response to the failings of the Washington Consensus, business figured the lack of strong institutions are to blame and hence billions have been spent of trying to build good governance practices. However, given the range of institutions (land reform, judicial reform, public sector pay, government auditing, corruption, budgeting, term limits, etc.) its hard to figure out where to start.
- It’s politics, stupid: In their 2012 best-seller “Why Nations Fail”, Acemoglu and Robinson argue that it is the politics of powerful elites that control capital and resources that are to blame. Hence, the idea is that weak institutions, bad policy and poor capital are designed and intended results of a well-positioned elite.
However, the models still fail to explain why some countries have astronomical success and why others fail. The chart below shows the relative income growth in South Korea and Ghana, and economists have struggled to explain where Korea succeeded and Ghana failed.
The biggest challenge is that ultimately each of the models points to an endogenous ingredient that is driving growth. It seems that in order to be effective these ingredients are not something provided from the outside, but rather are products/characteristics of the economic system itself.
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