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The Misconceptions of "Development Economics"

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The Misconceptions of The misconceptions of "development economics" Supplanting the price mechanism by government intervention Deepak Lai does not necessarily promote development Ideas have consequences. The body of and panaceas for solving the economic different "strategies of development," and thought that has evolved since World War problems of the Third World have come to (4) the role of the price mechanism in II and is called "development economics" form the corpus of a "development eco- promoting development. (to be distinguished from the orthodox nomics." These include: the dual economy, The last is, in fact, the major debate that "economics of developing countries"—see labor surplus, low level equilibrium trap, in a sense subsumes most of the rest, and box) has, for good or ill, shaped policies unbalanced growth, vicious circles of pov- it is the main concern of this article; for the for, as well as beliefs about, economic erty, big push industrialization, foreign major thrust of much of "development development in the Third World. Viewing exchange bottlenecks, unequal exchange, economics" has been to justify massive the interwar experience of the world econ- "dependencia," redistribution with growth, government intervention through forms of omy as evidence of the intellectual defi- and a basic needs strategy—to name just direct control usually intended to supplant ciencies of conventional economics (em- the most influential in various times and rather than to improve the functioning of, bodied, for instance, in the tradition of climes. or supplement, the price mechanism. This Marshall, Pigou, and Robertson) and seek- Those who sought a new economics is what I label the dirigiste dogma, which ing to emulate Keynes' iconoclasm (and claimed that orthodox economics was (1) supports forms and areas of dirigisme well hopefully renown), numerous economists unrealistic because of its behavioral, tech- beyond those justifiable on orthodox eco- set to work in the 1950s to devise a new nological, and institutional assumptions and nomic grounds. unorthodox economics particularly suited (2) irrelevant because it was concerned The empirical assumptions on which this to developing countries (most prominently, primarily with the efficient allocation of unwarranted dirigisme was based have been Nurkse, Myrdal, Rosenstein-Rodan, Bal- given resources, and hence could deal nei- repudiated by the experience of numerous ogh, Prebisch, and Singer). In the subse- ther with the so-called dynamic aspects of countries in the postwar period. This article quent decades numerous specific theories growth nor with various ethical aspects of briefly reviews these central misconcep- the alleviation of poverty or the distribution tions of "development economics." Refer- of income. The twists and turns that the ences to the evidence as well as an eluci- unorthodox theories have subsequently Development economics is used to denote dation of the arguments underlying the economics with a particular view of developing taken may be traced in four major areas: analysis (together with various qualifica- countries and the development process, in (1) the role of foreign trade and official tions) can be found in the author's work contrast to the mere application of orthodox or private capital flows in promoting eco- cited in the accompanying box. economics to the study of developing countries. nomic development, (2) the role and ap- Denial of "economic principle" For a discussion of this topic, seeA.O. Hirsch- propriate form of industrialization in de- man's Essays in Trespassing, (Cambridge, veloping countries, (3) the relationship The most basic misconception underly- 1981). between the reduction of inequality, the ing much of development economics has alleviation of poverty, and the so-called been a rejection (to varying extents) of the 10 Finance & Development/June 1985 ©International Monetary Fund. Not for Redistribution behavioral assumption that, either as pro- much different in developed or develop- real world of imperfect markets and im- ducers or consumers, people, as Hicks said, ing countries. Changes in relative factor perfect bureaucrats is a second best. But "would act economically; when the oppor- prices do influence the choice of technology judging between alternative second best tunity of an advantage was presented to at the micro level and the overall labor outcomes involves a subtle application of them, they would take it." Against these intensity of production in Third World second-best welfare economics, which pro- supposedly myopic and ignorant private economies. vides no general rule to permit the deduc- agents (that is, individuals or groups of tion that, in a necessarily imperfect market Market vs. bureaucratic failure people), development economists have set economy, particular dirigiste policies will some official entity (such as government, A second and major strand of the un- increase economic welfare. They may not; planners, or policymakers) which is both warranted dirigisme of much of devel- and they may even be worse than laissez- knowledgeable and compassionate. It can opment economics has been based on faire. the intellectually valid arguments against overcome the defects of private agents and Foretelling the future compel them to raise their living standards laissez-faire. As is well known, laissez-faire through various dirigiste means. will only provide optimal outcomes if per- Behind most arguments for dirigisme, Numerous empirical studies from differ- fect competition prevails; if there are uni- particularly those based on directly con- ent cultures and climates, however, show versal markets for trading all commodities trolling quantities of goods demanded and that uneducated private agents—be they (including future "contingent" commodi- supplied, is the implicit premise of an peasants, rural-urban migrants, urban ties, that is, commodities defined by future omniscient central authority. The authority workers, private entrepreneurs, or house- conditions, such as the impact of weather must also be omnipotent (to prevent people wives—act economically as producers and on energy prices); and if the distribution from taking actions that controvert its dik- consumers. They respond to changes in of income generated by the laissez-faire tat) and benevolent (to ensure it serves the relative prices much as neoclassical theory economy is considered equitable or, if not, common weal rather than its own), if it is would predict. The "economic principle" could be made so through lump-sum taxes to necessarily improve on the working of is not unrealistic in the Third World; poor and subsidies. As elementary economics an imperfect market economy. While most people may, in fact, be pushed even harder shows, the existence of externalities in people are willing to question the omnip- to seek their advantage than rich people. production and consumption and increas- otence or benevolence of governments, Nor are the preferences of Third World ing returns to scale in production, or either there is a considerable temptation to believe workers peculiar in that for them too (no of them, will rule out the existence of a the latter have an omniscience that private matter how poor), the cost of "sweat" rises perfectly competitive Utopia. While, clearly, agents know they themselves lack. This the harder and longer they work. They do universal markets for all (including contin- temptation is particularly large when it not have such peculiar preferences that gent) commodities do not exist in the real comes to foretelling the future. when they become richer they will not also world, to that extent market failure must Productive investment is the mainspring seek to increase their "leisure"—an as- be ubiquitous in the real world. This, even of growth. Nearly all investment involves sumption that underlies the view that there ignoring distributional considerations, pro- giving hostages to fortune. Most invest- are large pools of surplus labor in devel- vides a prima facie case for government ments yield their fruits over time and the oping countries that can be employed at a intervention. But this in itself does not expectations of investors at the time of low or zero social opportunity cost. They imply that any or most forms of govern- investment may not be fulfilled. Planners are unlikely to be in "surplus" in any ment intervention will improve the out- attempting to direct investments and out- meaningful sense any more than their comes of a necessarily imperfect market puts have to take a view about future Western counterparts. economy. changes in prices, tastes, resources, and Nor are the institutional features of the For the basic cause of market failure is technology, much like private individuals. Third World, such as their strange social the difficulty in establishing markets in Even if the planners can acquire the nec- and agrarian structures or their seemingly commodities because of the costs of making essary information about current tastes, usurious informal credit systems, neces- transactions. These transaction costs are technology, and resources in designing an sarily a handicap to growth. Recent appli- present in any market, or indeed any mode investment program, they must also take cations of neoclassical theory show how, of resource allocation, and include the costs a view about likely changes in the future instead of inhibiting efficiency, these insti- of excluding nonbuyers as well as those of demand and supply of myriad goods. Be- tutions—being second-best
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