Economic theories and perspectives on development Marina Della Giusta

Economic theories and perspectives on development Marina Della Giusta [email protected] ‘The earth provides enough resources for everyone’s need, but not for some people’s greed’ Ghandi

Menu 1. Economic theories of development 2. The two main policy schools: let’s all grow! 3. Limits to growth: sustainable development. 4. So what? Role for the market and goals for public policy.

1. Economic theories of development What development economists agree on: Development economics: deals with the economic, social, political, and institutional mechanisms, both public and private, necessary to bring about improvements in wellbeing. Structural change is an essential part of this process BUT: does this mean a shift away from agriculture or increases in productivity throughout the economy? (see Timmer’s papers on Blackboard)

Back and forth: theories of economic development See Hunt, D. (1989) Economic Theories of Development: An Analysis of Competing Paradigms H. Wheatsheaf. 338.9-HUN, ch3 1945-mid1950s Context: political independence of several developing countries, Worldwide policies to boost aggregate demand (Keynesian), setting up of the Bretton Woods institutions (World Bank, IMF, WTO), state intervention and planning of the economy (Soviet Union) Ideas underdevelopment as low-level equilibrium caused by low savings, high population growth, market failures due to scale economies and externalities (Rosenstein-Rodan, Nurkse), dual economy with backward sector (agriculture) and modern sector (industry) (Lewis), emphasis on intersectoral linkages and discussions about the benefits of balanced versus unbalanced economic growth (Lewis, Hirschman) mid1950s-late 1960s Context uneven international development (Myrdal) and import substitution policies to promote industrialisation Ideas Marxist theorists (Baran): importance of political and social factors in development and inefficiency and corruption of capitalist state. Structuralism (Cardoso, and Prebisch at the UN ECLA, Chenery): recognition of structural rigidities typical of DCs : supply rigidities in agriculture and industry, terms of trade weighted against DCs exports (Singer and Prebisch)

mid1960s-1980 Context emergence of the Newly Industrialised Countries –Taiwan, Singapore, South Korea, Hong Kong, debt problem in LA and SSA Ideas revival of neoclassical economics, free market policies and export orientation (Lal, Little, Scitovsky); emergence of basic needs agenda, emphasising neglect of the poor; dependency school: criticism of structure of international relations and trade (and transnational corporations) which systematically hampers efforts of ISI countries 1980s and 1990s: Context Debt crisis, IMF and WB first structural adjustment wave: recession and poverty increases. Revision of the NIC’s experiences showing the scope for state intervention and the synergies between states and markets, BUT continuing pressure to liberalise. Ideas Raise of institutions: New growth theory emphasising role of income inequality, education and natural resources, New structuralist theory studying determinants of growth, income distribution, inflation, and fiscal and balance of payments problems. Micro: New neoclassical approaches (industrial organisation, game theory and information economics) applied to development (agrarian relations, income distribution, causes of poverty). POST CRISIS: rediscovery of state intervention and regulation (back to the 1940s?)

2. Development policies: West vs South (and East) The Washington Consensus (World Bank and IMF policies): macroeconomic stability (control of inflation and reduction of fiscal deficit), liberalise trade and factor markets (privatisation and deregulation), globalisation of development policy analysis (one recipe) and a-historical performance assessment Beliefs: markets work well and are superior to gvts. in resource allocation, all economies behave in the same way, all economies tend to equilibrium, predictable response to policy, speed of transition depends on the consistency of policy makers and the swift removal of barriers to market functioning Issues not addressed: how long is the transition? how large the negative effects to be tolerated? how large the positive ones needed to compensate them? First adjustment wave -Washington Consensus: adoption of different trade regimes (elimination of trade barriers adopted during the Import Substitution phase), privatisation of large domestic firms (particularly in the service sector), deregulation of labour and financial markets Second adjustment wave “refurbished Washington Consensus” or “augmented Washington Consensus”: investment in education, training and infrastructure, access to finance for modernisation for small and medium enterprises (SMEs), education reform, safety net type of projects for those who bear the costs of reform , need for ‘good governance’ and anti-corruption measures, controls on flows of hot money

The “Southern” Consensus (Latin American Structuralism and East Asian Developmentalism): reject idea that there is one recipe for growth with late industrialisation, heavy emphasis on historical analysis of processes of late industrialisation in the world periphery, emphasis on development of national capabilities. Beliefs: institutional failures of markets, governments, and international institutions structural differences and asymmetries exist, path-dependency (history matters) and lock-in (some processes may be irreversible) Asymmetric globalisation in wealth generation and in markets: think of mobility of capitals and products and barriers to labour mobility. Policies: growth and structural change to be achieved through “strategic integration” of national economy into the world economy (attention to time and sequencing of opening up); combine macroeconomic policy with “productive development policy”, mixing sectorally-neutral and selective policies (technology policy, financial policy, human resource development, physical infrastructure development, industrial organisation and competition policy); government-business co-operation (common vision of development targets), pragmatic developmental state (support for private sector temporary and conditional on targets); management of distributional dimensions of the growth process to ensure legitimacy (wide asset ownership and expansion of productive employment: agrarian reform, rural development policies, re-investment of profits, profit-related payment systems, support for SMEs); regional integration and co-operation policies

3. Sustainable development "Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist." Kenneth Boulding (1910-1993) Read: http://limitstogrowth.net/Essay.html

3.1 Biophysical limits to growth Finitude: fixed size of the ecosystem that hosts an expanding economic system Entropy: the ordered structures of the economic subsystem are maintained at the expense of creating a more than offsetting amount of disorder in the rest of the system. Ecosystem as source of low-entropy inputs and sink for high entropy waste. Entropic costs depletion of resources and pollution (see contraction and convergence reading) Ecological interdependence: ecological connections between economic sub-system and its hosting ecosystem are disrupted with growth of economy

3.2 Ethical and social limits to growth Cost to unpaid workers: anything that does not enter the calculations of GDP does not matter, therefore it can be used up without need for reinvestment Costs to future generations: how do discount rates work? Welfare of future people? Cost to other life forms: extinction and the welfare of other animals and planet (Calculate your own ‘ecological footprint’: http://adbusters.org/metas/eco/truecosteconomics/) “The capitalist mode of production is not the famous capital-wage-labour relation, but rather needs different categories of colonies, women, other peoples and nature, to uphold the model of ever-expanding growth” (Mies, Maria (1986) Patriarchy and Accumulation on a World Scale London and New York: Zed Books)

What then? United Nations Definition of Development The basic purpose of development is to enlarge people's choices. In principle, these choices can be infinite and can change over time. People often value achievements that do not show up at all, or not immediately, in income or growth figures: greater access to knowledge, better nutrition and health services, more secure livelihoods, security against crime and physical violence, satisfying leisure hours, political and cultural freedoms and sense of participation in community activities. The objective of development is to create an enabling environment for people to enjoy long, healthy and creative lives." Mahbub ul Haq UN definition of sustainable development: development which meets the needs of the present without sacrificing the ability of the future to meet its needs. Growth: quantitative increase by assimilation or accretion of materials Development: qualitative improvement, realization of potential Sustainable development: development without growth, limit the scale of throughput the flow beginning with raw material inputs, followed by their conversion into commodities and finally into waste outputs. Herman Daly ‘Beyond growth: the economics of sustainable development’ (see also http://dieoff.org/page88.htm)

What role for the market? Market efficient mechanism for allocation of resources not for scale or distribution! What should public policy be about? Evidence shows in fact that income is but one factor in determining well being, and that once basic needs are satisfied it is not associated with increases in well being, and other factors matter much more instead. What is the current relationship between income levels and wellbeing? http://hdr.undp.org/en/statistics/data/hdi gdp/

Income and happiness in the United States 90 80 real income per head % very happy 70 60 50 40 30 % very happy 20 10 0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Cross-sectional evidence across countries – among industrialised countries with incomes over 20,000 per head there is no relation between average income and average happiness. Helliwell (2003) explains 80% of the variance across 50 countries with only 6 variables: income, RELATIVE income (which in many surveys matters more than actual!), having a job, being healthy, having functioning relationships, and trust.

Some Happy Policies The policy implications (Layard, EJ 2005): massive redistribution, increased health expenditure, reduced working hours, incentives to reduce rather than enhance labour mobility, rethinking and drastically curbing advertising and performancerelated pay as they create anxiety and unhappiness. Consumption taxes: (Robert Frank) we should tax consumption and not income (as that taxes savings) and have unbound upper rates. Watch this:http://www.thersa.org/events/vision/vision-videos/robertfrank---10-june-2009. Check out readings on Blackboard, get in touch if you want to know more [email protected]