Expert Comment Understanding Development: Alternatives to Conventional Economic Approaches Jayati Ghosh November 2, 2016 Copyright © 2016 by Dialogue of Civilizations Research Institute The right of Jayati Ghosh to be identified as the author of this publication is hereby asserted. The views and opinions expressed in this publication are those of the original author(s) and do not necessarily represent or reflect the views and opinions of the Dialogue of Civilizations Research Institute, its co-founders, or its staff members. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, please write to the publisher: Dialogue of Civilizations Research Institute gGmbH Französische Straße 23 10117 Berlin Germany +49 30 209677900 [email protected] Dialogue of Civilizations Research Institute 1 Understanding Development: Alternatives to Conventional Economic Approaches Jayati Ghosh Executive Summary Since the sixteenth century, economists have been essentially concerned with understanding the processes of economic growth and structural change: how and why they occurred, what forms they took, what prevented or constrained them, and to what extent they actually led to greater material prosperity and more general human progress. Since the 1950s, we have seen an upsurge in economic literature relating to both development and underdevelopment. There were many diverse approaches, but they all shared the common perspective that development is not about simply reducing deprivation, but essentially about transformation – structural, institutional, and normative – in ways that add to a country’s wealth-creating potential, ensuring the gains are widely shared and extending the possibilities for future generations. For most developing countries, that still meant building industrial capacity, providing secure livelihoods for rapidly growing urban populations, guaranteeing food security, and providing other basic needs. Then in the 1980s, we witnessed a shift away from development economics to a focus on poverty alleviation. This paper explores the underlying principles and assumptions behind this shift and argues that we should refocus on transforming the economies in which poor people live, rather than simply ameliorating the conditions of their poverty. The author argues that macroeconomic process need to be taken into consideration and criticises several recent attempts to accomplish this, including the use of purchasing power parity exchange rates and financial deregulation. She makes a strong case for the urgency of accepting and implementing alternative economic models. Policy Recommendations: The effective implementation of alternative economic models would require the following principles to be recognised and tailored to the specific circumstances in individual countries: • a single-minded focus on GDP as a measure of economic success is counterproductive; • the focus should be on improving the material life and social conditions of at least the bottom half of society; • this revised focus will generate aggregate income growth through a bubble-up (rather than trickle-down) process; • employment generation must be a critical goal; 2 Dialogue of Civilizations Research Institute • fiscal austerity policies should be avoided; • trade and industrial policies are essential to ensure the diversification of production towards greater shares of higher value added activities. Keywords: financial liberalisation; purchasing power parity; PPP; gross domestic product; GDP: macroeconomics; microeconomics; development economics; poverty alleviation; economic growth; alternative economic models Dialogue of Civilizations Research Institute 3 There was a time when economists were inevitably concerned with development. From the early economists of the sixteenth and seventeenth centuries to those of the mid-twentieth century, all were essentially concerned with understanding the processes of economic growth and structural change: how and why they occurred, what forms they took, what prevented or constrained them, and to what extent they actually led to greater material prosperity and more general human progress. And it was this broader set of ‘macro’ questions which in turn defined both their focus and their approach to more specific issues relating to the functioning of capitalist economies. It is true that the marginalist revolution of the late nineteenth century led economists away from these larger evolutionary questions towards particularist investigations into the current, sans history. Nevertheless, it might be fair to say that trying to understand the processes of growth and development has remained the basic motivating force for the study of economics. To that extent, it would be misleading to treat it as a branch of the subject, since the questions raised touch the core of the discipline itself. But what is now generally thought of as development economics has a much more recent lineage and is typically traced to the second half of the twentieth century – indeed, to the immediate postwar period of the 1950s and 1960s, when there was a flowering of economic literature relating to both development and underdevelopment. Some of this literature found its inspiration in the planning literature of the Soviet Union in the interwar period, while other work focused on the systemic tendencies in global capitalism that generated inequality and ensured lack of development in some countries, as reflected in ‘structuralist’ analysis. Others retained the fundamentals of the mainstream approach, even while altering some of the assumptions. Thus the economic dualism depicted by Arthur Lewis (1954), the co-ordination failures inherent in less developed economies described by Rosenstein-Rodan (1943), and the efficacy of unbalanced, ‘big push’ 4 Dialogue of Civilizations Research Institute strategies for industrialisation advocated by Albert Hirschman (1969) all in a sense dealt with development policy as a response to the market failures that were specific to latecomers. All of these diverse approaches shared the common perspective that development is not about simply reducing deprivation, but essentially about transformation – structural, institutional, and normative – in ways that add to a country’s wealth-creating potential, ensuring the gains are widely shared and extending the possibilities for future generations. For most developing countries, that still meant building industrial capacity, providing secure livelihoods for rapidly growing urban populations, guaranteeing food security, and providing other basic needs, among other features. This in turn meant the critical issues related to the nature of growth: the extent to which it generates structural changes in the economy that are associated with increases in the aggregate productivity of labour; the extent to which it generates productive employment for the labour force; the extent to which it ensures that asset and income distribution changes (possibly through redistributive policies) allow the benefits of growth to reach the poor; the extent to which the process increases the population’s access to basic goods and services that affect the quality of life and human poverty. 1. From Development to Poverty Alleviation But sometime in the 1980s, all of this discussion receded into the background, and development economics, even of the mainstream variety, suffered a fate similar to Keynesian economics in developed countries – of being first reviled, then ignored, and finally forgotten. The associated focus on poverty alleviation, in what could be called the global ‘development industry’, involves a much sharper focus on the micro, on the miniature as a useful and relevant representation of the larger reality. It is very much a product of the Dialogue of Civilizations Research Institute 5 intellectual ethos prevailing in the academic centres of the North – almost all of the practitioners, whatever their country of origin, actually live and work in these places. Therefore it is a reflection of a deep internalisation of the basic axioms of mainstream North Atlantic economic thinking, especially in terms of the dominance of the neoliberal marketist paradigm. Some underlying principles of this approach are worth noting, since they are rarely explicitly stated. This approach remains firmly entrenched in the methodological individualism that characterises all mainstream economics today. The models tend to be based on the notion that prices and quantities are simultaneously determined through the market mechanism, with relative prices being the crucial factors determining resource allocation as well as the level and composition of output. This holds whether the focus of attention is the pattern of shareholding tenancy, or semiformal rural credit markets, or a developing economy engaging in international trade. This literature also posits a basic symmetry not only between supply and demand, but also between factors of production. Thus, the returns on factors – land, labour, capital – are seen as determined along the same lines as the prices of commodities, through simple interaction of demand and supply. Where institutional determinants are acknowledged, they