Econ171 Economic Development · PDF fileToo little attention paid to institutional...

Tuesday 2nd, August, 2011Meeting 25

Econ N171 Economic DevelopmentAtanu Dey

Paper “Subsistence, Trade and Exchange: Understanding Developing Economies.”

Bauer criticized mainstream development economics◦ Neglect of internal trade

◦ The notion of the vicious cycle of poverty

◦ Nonmonetized investment leading to capital formation

Econ N171 Aug 2nd '11 Atanu Dey 2

TOWARDS A NEW PARADIGM FOR DEVELOPMENT

– Dr. Joseph E. Stiglitz, October 1998

Later

Sustainable development: a market-liberal vision

- James A. Dorn


Broader objectives of development than embodied in the consensus

It confuses means with ends: privatization and trade liberalization are means to the goal of sustainable and democratic growth

Too little attention paid to institutional infrastructure required for markets to function and for competition to work


The phrase coined by John Williamson in 1990 refers to “the lowest common denominator of policy advice being addressed by the Washington-based institutions to Latin American countries as of 1989.”

What is it?◦ http://www.cid.harvard.edu/cidtrade/issues/washington.html


A redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure

Tax reform (to lower marginal rates and broaden the tax base)

Interest rate liberalization A competitive exchange rate Trade liberalization Liberalization of inflows of foreign direct investment Privatization Deregulation (to abolish barriers to entry and exit) Secure property rights


Corporate governance Anti-corruption Flexible labor markets WTO agreements Financial codes and standards “Prudent” capital-account opening Non-intermediate exchange rate regimes Independent central banks/inflation targeting Social safety nets Targeted poverty reduction


“… not only the Washington consensus but also earlier development paradigms failed: they viewed development too narrowly”

“Development represents a transformation of society, a movement from traditional relations, traditional ways of thinking, traditional ways of dealing with health and education, traditional methods of production, to more „modern‟ ways.”


From the traditional to the modern

Needed change provides more freedom, control over their destinies

Therefore development strategy must facilitate that transformation

Development was seen as economic growth –increase in capital stock and better resource allocation.


Left-wing and Right-wing

Left economists saw a role for the government to fix market failures

Right economists recognized government as the problem and markets the solution


They cannot fix market failures

They lack the resources needed for resource allocation

They play too large a role

Their objectives were rent-seeking instead of development

Public Choice Theory – James Buchanan (b. 1919.) Nobel Prize Economics 1986.


Appeal to history

Govt had an active role in those economies that developed

Where govt was missing, development did not take place

Capitalist economies before govt intervention were unstable and iniquitous


While markets are at the centre of the economy, govt must play an important role. It‟s a matter of balance – it depends on the country, the govt, the maturity of its markets – it is context sensitive.


Collapse of the USSR and the end of the Cold War

The failure of the Washington Concensus – failure of “liberalization, stabilization, and privatization” or the neoliberal prescription

Some countries that followed the WC did not develop Others which did not follow the WC did develop

What went wrong is that the subtleties of markets were not understood, that private property and “getting prices right” are not sufficient to make markets work. It also needs institutional infrastructure. Competition was missing.


It did not follow the neoliberal policies and yet it did develop

Govt played a role – state ownership of some industries and policy of promoting some industries

Govt intervention in trade (export promotion)

Govt regulation of financial markets

Govt emphasis on education, technology and closing the knowledge gap


Late 90s

Ingredients of the crisis

Crony capitalism

Financial mismanagement and inadequate financial institution supervision

Short-term capital flows◦ Average daily turnover in global foreign exchange

markets is estimated at $3.98 trillion


Core objective: the transformation of society

GDP growth per capita is important but only in part

It has to increase standard of living in terms of health and literacy


They are less detailed than plans (that were used for central planning)

Set the vision for the society – which may include quantitative targets but only as elements, not the goal

Include a transformation of institutions, the creation of new social capital and new capacities

Cannot be a blueprint or a map of where society is going – that requires too much information and there are uncertainties


All societies are resource-constrained

Poor countries have limitations such as govt capacity

So priorities have to be set

Sequencing: creating a competition and regulatory framework before privatization


Economic theory says that prices perform all the coordination required – but this needs a full set of markets.

Poor countries have missing markets

So coordination between private and public sector is needed, and within and among govt agencies

This coordination must be a function of the development strategy


To achieve political and social stability

For “ownership” of policies

Inclusive development


Could explain lack of development impact

Range of projects – with different social returns

Good projects are funded by aid agencies and that releases resources for bad projects

The additional benefits of the funded projects is hard to access

The marginal benefits are often lower than anticipated


How wide is the coverage from a project

Example of “One Laptop Per Child” ◦ Since all students cannot be given one, it will

increase inequality

◦ Instead, increasing opportunities for all students will be a better utilization of resources


Effective Change Arises from Within

This happens through ownership and participation in the process of development


Private sector development◦ As opposed to a focus on the government

◦ Help create a competitive, efficient private sector

◦ A healthy and educated labor force

Public sector development◦ These are typically mis-managed

Community Development, Family Development, and Individual Development


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