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Question of development

Print edition : Sep 22, 2006 T+T-

The three books under review deal with important questions using development economics as the focus.

DEVELOPMENT economics, as it is usually understood, is the branch of economics that studies the performance - income and employment generation, trade and taxation, for instance - of underdeveloped countries such as India. That description, however, raises some questions. What forms the distinction between developed and underdeveloped countries? What are the factors responsible for underdevelopment and what is the process of development? How distinct is development economics from economics as such and which of the two is more general or basic? Questions of a more formal nature also arise. Is economics a universal science whose laws and methods are applicable at all times and in all places or is it (should it be) a temporally and spatially contextual procedure of inquiry? If it is a science, should it be concerned with derivation of general principles through deductive logic or should its focus be the analysis and understanding of concrete empirical phenomena?

These questions have engaged the attention of practitioners from the early days of the development of the discipline and continue to be discussed even today. And there are different traditions or schools of thought within the discipline mainly because there are no definitive answers to the questions.

The three works brought together here deal with many of these questions using development economics as the focus. Although they have a common theme, the same publishers and one of the editors in common, they are not claimed to be three sequential volumes of one publication. I shall, however, refer to them as the first, second and third volumes in the order in which they appear in the box of this review and arranged for convenience of exposition. The context - indeed it would appear to be the provocation - of the 36 essays in these three volumes (apart from the editorial introductions in each) is the appearance and rise to prominence of what the title of the first volume refers to as "The New Development Economics" towards the end of the 20th century, that is, less than a decade ago.

What in the mid-20th century emerged as Development Economics was a response to the economic backwardness of the large number of countries, especially in Asia and Africa, that changed their political status from colonies of Western powers (developed economies) into independent countries and as members of the United Nations Organisation (U.N.). Low per capita income, unemployment of vast sections of their populations, low productivity of those employed because of primitive technologies, and general dependence on agricultural activities - these were the specific manifestations of their backwardness. To be politically correct, `backward' soon came to be replaced with `underdeveloped' or even `less developed'. But it is right to say that Development Economics (now `Old' Development Economics) had the livelihood issues of people in newly emerging nations as its central concern.

Policy issues that came to occupy prominence in development economics were derived from that concern too. Growth, understood as increase in production, appeared as a matter of top priority. But low-income countries were said to be caught up in a vicious cycle - low productivity, low incomes, low savings, low investments, back to low productivity again. Resource gaps were identified. Foreign aid was recommended, not in small instalments, but large enough to give a `big push'. Methods had to be found to convert surplus labour into capital. Technology had to be devised for this purpose. Industrialisation was necessary to absorb labour and increase productivity. Such changes may not happen naturally. The state must play an active role - generating resources, carefully allocating them, providing a long-term profile of development. This much was common and `official'. One of the earliest contributions to development economics was the U.N.'s 1951 publication, Measures for the Economic Development of Under-Developed Countries.

There were differences and lively debates too. Some people did not see the need for industrialisation (or doubted whether industrialisation was feasible under conditions of backwardness) and suggested a strategy of development via the improvement and modernisation of agriculture. The need for and the pattern of land reforms were contested issues. The choice of technology (capital-intensive versus labour-intensive initially, and the definition of appropriate technology subsequently) turned out to be the topic of some major debates. Balanced versus unbalanced growth was another theme of debate.

But on one aspect there was near unanimity in the 1950s and the 1960s - growth was the prime requirement of underdeveloped countries - the cake had to become bigger. It was a matter of general conviction that growth would benefit all, possibly with a permissible time gap. And during the period growth did take place in most of the underdeveloped countries hitherto considered to be stagnant. But it appeared to be uneven, becoming a visible reality for a few, but leaving the many untouched, the gap becoming glaringly palpable. The World Bank, one of the international institutions set up in the post-Second World War period mandated specifically to assist in long-term development, then came up with the proposition that growth had to be accompanied by redistributive measures if it was to reach out to all sections of the population, especially the weaker sections. Redistribution with Growth, became the new development mantra.

It appeared to be a radical view at that time. For, the conventional wisdom among economists was either that considerations of equity were a luxury that underdeveloped economies could not afford (the soft view) or that in the early stages of development inequalities were a requirement to increase savings and investment (the hard view). But in democracies such as India, where programmes of development had to be validated periodically through popular mandates and where political leaders needed mass support, eradication of poverty (garibi hatao) entered the political agenda as the new and radical slogan.

But within a decade there was to be a retreat from such rhetoric, this time the leadership coming from the political arena, but picked up and legitimised immediately by economists with the backing of international institutions, the World Bank again providing the articulation. In the late 1970s/early 1980s Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom challenged the then economic orthodoxies, mainly the role of the state in the economy. Reversing many of the New Deal policies that prevailed from the 1930s under Franklin Roosevelt in the U.S. and the welfare state programmes in post-Second World War U.K., these two leaders brought back the magic of the market and of the invisible hand in matters economic. Top economists in the World Bank reconstructed policy-oriented economics to be based principally on incentives for individuals with the market providing the necessary and correct signals. One of them wrote in 1982: "Once it is recognised that individuals respond to incentives, and that `market failure' is the result of inappropriate incentives rather than of non-responsiveness, the separateness of development economics as a field largely disappears." To many that pronounced the `death of development'; it was followed by burial rituals throughout the 1980s.

With the accent on development removed, economists were quick to return to their own universe of discourse. The theoretical proposition that utility maximising rational individuals and profit maximising producers responding to automatically functioning market signals would guarantee optimal use of resources at any given time and the best possible growth over time gained ground again. To make this possible, the state had to retreat to its corner from where it would just protect property rights and contractual obligations, thereby ensuring a market-friendly economy to function on the basis of its own laws. A more detailed version of this position came to be known by the early 1990s as the `Washington Consensus'. Its efficacy in the realm of development came to be celebrated as the East Asian Miracle, the spectacular achievements of the alleged market-oriented development policies, mainly of South Korea and Thailand. Not that the state withdrew completely from the arena of development. Its role was to provide a stable macroeconomic environment, `to get the basics right' and to ensure the essential framework for private investment.

This paradigm was not to last long. Development economics was back soon with considerable `theoretical' refinement. The emergence of this `New Development Economics' (NDE) and its critique constitute the theme of the first volume. Of the 14 contributions in the volume, four are by Ben Fine, one of the editors, who is a Professor at the School of Oriental and African Studies of the University of London and a well-known commentator on development issues. He is also the co-author of one of the essays in the volume. The exposition of the NDE is largely by him.

But a more concise and less polemical account of it is the piece by Terrence Byres, Emeritus Professor of Political Economy in the University of London, familiar to many Indian readers as the editor of two studies relating to India, The Indian Economy: Major Debates since Independence, and The State, Development Planning and Liberalisation in India, both published in 1998. The rest of the essays in the volume are on specific topics such as technology, human capital, social capital, privatisation and corruption, all in the context of development. All contributions are of high quality with critical surveys of recent literature not readily available in India. Hence the volume is recommended strongly, especially to researchers and advanced students of development studies.

The theoretical underpinnings of NDE came from two somewhat related sources. The first related to asymmetries of information within the economy. Conventional economics, particularly its most `rigorous' school, neoclassical economics, had accepted as axiomatic that information was freely and readily available to all participants in the system. But from the early 1970s, instances that were contrary to this view had been located. One that became a `classic' was transaction of used cars where the owners who wished to sell them had obviously more crucial information than any potential buyers. If such asymmetric information was an inherent feature of the economy, it was no longer possible to concede to the market some of the claims that theory had conferred upon it.

The second source related to what was put forward as `transaction costs' several decades ago, but had remained neglected for long. The key issue here was that if exchange were a costless activity, why would there be institutions associated with it such as firms. Various items of costs (apart from cost of production) were identified and were given the generic name `transaction costs'.

Informational inadequacies and asymmetries and transaction costs became the legitimate basis for non-market institutions in the economy, among them, the state. A new branch of economics that named itself `institutional (or new institutional) economics' emerged and gained legitimacy and prestige when its founders were awarded the Nobel Prize in the mid-1990s. The economist who put forward the argument about asymmetric information also received the Nobel Prize around this time.

Themes that were outliers soon began making inroads into the mainstream of economics. Their incorporation was facilitated by another Nobel laureate, Joseph Stiglitz, who, as one time chief economist and senior Vice-President at the World Bank and a member of the U.S. President's Economic Advisory Council apart from being Professor in some leading U.S. universities, had the credentials of an academic economist acquainted with real-life economic problems.

(From his later book Globalization and Its Discontents, it is clear that he had also become a sharp critic of the Washington Consensus, especially the role of the International Monetary Fund's stabilisation policies.)

Through a series of widely discussed lectures and writings, Stiglitz virtually became the author of NDE. In the mid-1990s, he wrote: "During the past 15 years, a new paradigm, sometimes referred to as the information-theoretic approach to economics... has developed.... This paradigm has already provided us with insights into development economics and macroeconomics." (Quoted by Ben Fine on page 8 in the first volume.) Fine also refers in this context to "the proliferation of `new' fields of economics over the past decade - the new institutional economics, the new economic sociology, the new political economy, the new growth theory, the new labour economics, the new economic geography, the new financial economics, the new development economics and so on".

Everything appeared to have become `new' during the past decade, but (fortunately) we can confine ourselves to New Development Economics. According to Stiglitz, the Washington Consensus and even earlier development paradigms failed because they viewed development too narrowly as confined to the economic sphere. In leaving out history, institutions and distributional considerations, neoclassical economics was leaving out the heart of development economics. Development has to be seen as a `holistic process', a transformation of society, paying attention to considerations of sustainability, equity and democracy.

Three striking differences between the economics of the Washington Consensus and the post-Washington Consensus NDE have been noted. The former had universal strategies of stabilisation, structural adjustment, getting the fundamentals right and so on. The NDE's strategies are much more related to the specifics of each situation. Secondly, among these specifics in most developing countries, direct measures for poverty eradication have to be undertaken. Thus, concerns about poverty that had been pushed aside substantially by the Washington Consensus became one of the central themes in the NDE. Thirdly, the state is back at centre stage in NDE as a systemic requirement not only in view of `market failures' as was recognised in earlier approaches, but because of missing markets, informational asymmetries and other forms of inadequacies. In sum, the distinguishing feature of NDE is "a quest for a particular institutional set-up (a `partnership' between state and society - private profit and non-profit sectors) that maximises `benefit to society'" (page 33, first volume). It appeared as though development economics had been brought back, not in its old eclectic form but with theoretical robustness and refinement.

But Ben Fine has a number of criticisms of NDE - something of an overkill, indeed - especially of its claim to have brought about a paradigm shift. Terence Byres' criticisms are more to the point. First, for all its claims of radical departure from conventional theories, NDE rests squarely on the premises of individual rationality and the quest for maximisation of benefits as the driving force of the economy. Its recognition of group of actors such as landowners, sharecroppers, traders, moneylenders and so on, may give a semblance of departure from standard economic theory, but there is no recognition of antagonistic or class divisions.

Secondly, therefore, NDE views the economy as being grounded on mutuality, if not harmony. That is why development becomes a quest for the benefit of all, which can be achieved provided institutional coordination can be brought about. While NDE is built on the realistic notion of asymmetry of information in the system, it totally glides over the problem of asymmetry of power and the innate exploitative proclivities of the system. Because of this, NDE does not enter into an inquiry into the nature of the state, even while it recognises the role of the state. It is as though the state, any state, can become a developmental state if it so chooses. Thirdly, while NDE is rich in prescriptions to move out of backwardness, it is almost totally silent on the diagnosis of backwardness although it provides a list of symptoms. The question then is: How is a theory to be evaluated? In terms of its prescriptive power or its diagnostic skill?

In terms of publication dates, what I have designated as the first volume was the last to appear. But through its exposition and critique of New Development Economics it poses the question of the nature of authentic Development Economics - a question for which there is no answer in it or even in the two companion volumes. But obviously, answering that question, indirectly at least, must have been the objective of the volumes. The Introduction to the first volume states "this book is offered as a selective engagement across the battleground of development economics" (page xxi). To probe into the matter, it is necessary to go back to the beginnings. But when did development economics begin? One response to this question has already been referred to: development economics in its present form emerged around the middle of the 20th century, that is, some 60 years ago. But then, what was economics concerned with prior to that? Did it not deal with development issues such as what should a backward economy do to develop? Should it concentrate on agriculture, the basic or primary economic activity, or move to secondary activities, particularly industry? Is it to be done by each country independently or by interaction with other countries through trade? What is to be the role of the state in such efforts?

The second and third volumes deal with the manner in which these questions were handled over time in the evolution of economics. There are two broad approaches to economics (as briefly indicated in the first paragraph of this review). One of them puts the emphasis on its formal and logical aspects and its general applicability as a science. The other is more concerned with its substantive subject matter. Those who adhere to the former position trace its ancestry to Adam Smith's classic work The Wealth of Nations (1776). Although in it Smith had dealt with a wide range of issues, what have subsequently been elaborated are his observations of exchange as an innate human activity and the market as the automatic functioning (the much celebrated `invisible hand') mechanism facilitating it. The `universal laws of economics' have been premised on these observations. By the middle of the 20th century, those who followed this tradition claimed to have built up economics as the universal science of choice under conditions of scarcity.

But this has been essentially an Anglo-American tradition passed on to the former British colonies, including India. (Those who are interested in a detailed exposition of this tradition and a critique of it may consult my Rethinking Economics, Sage Publications, 1996.) That Smith was not the founder of economics can be seen from the fact that half a century before the publication of The Wealth of Nations, professorships in economics were established in Germany in 1727 (see page 57 in the second volume). It is a contested issue whether even in the U.K. Smith's work was the first major writing on economics, or political economy, as it was then known. A strong case has been made (by Colin Clark, Arthur Lewis and Amartya Sen among recent writers on economics and developmental economics) that in the U.K. the first major writings on economic issues were by William Petty (1623-1687) whose A Treatise of Taxes and Contributions (1662), Political Arithmetic (1671-72) and other contributions dealt with a number of important economic issues. The essay on Petty in the third volume is a critical account of his contributions.

A significant observation is that many of the themes that Petty discussed would today be considered as developmental issues - the faster growth of France compared to Britain; sectoral transformation which Colin Clark in his well-known work on the theme referred to as `Petty's Law'; property rights, land-labour relationships and the emergence of the cash economy (all relating to Ireland); role of political processes in economic performance and transition (all from the perspective of a staunch colonialist); and so on.

The essays in the second volume try to trace the origin of development economics to several European traditions - Mercantilism, the Italian tradition, and the German tradition in particular. Mercantilism is the catch-all expression covering the economic policies and practices that prevailed in Europe from roughly the mid-15th to the mid-18th century when nation-states were emerging in the continent and colonialism and colonial rivalries were rampant making commerce the most visible economic activity. Trade and commerce appeared also as the basis of the wealth, prosperity and prestige of the nation-states - with acquisition of gold as the most palpable measure of success.

Naturally, mercantilist economics was policy-oriented. But the policies were context-specific, keeping the glory of the nation as the objective. If, for long, commerce was the best means to achieve this objective, the mercantilists supported it. When production, particularly industrial production, appeared a better means, attention shifted to it so much so that a modern student of mercantilism has expressed the view that mercantilism, at its core, was an import substitution policy. But import substitution and protection as its instrument was not to be forever either. In view of these features of mercantilism the authors of the essay trace the origins of development economics as the praxis originating in the changing world of the mercantilist era.

The Italian tradition also goes back to the pre-Smithian era, with very much of a development economics orientation. Italy in those days consisted of different principalities or countries and one of the observed puzzles was that countries rich in natural resources such as Naples were poorer and were supplying raw materials to countries such as Venice, which, paradoxically, were rich in spite of a lack of natural endowments. Reflections on this phenomenon led to the realisation that it was manufacturing that was adding value to products. And since it was domestic labour that was responsible for manufacturing, they were led to what may be conveyed in contemporary terminology to a policy of import-substituting industrialisation. The Italians, thus, came to contest the French physiocratic school's claim that only agriculture was `productive'. However, their position was not one of favouring manufacture against agriculture, but one of searching for synergy between these two forms of activities. The Italians also put forward arguments in favour of `free trade'; but free trade for them meant opposition to trade monopolised by large companies. When it came to trade between countries they were generally in favour of exports and wanted the state to restrict imports using tariffs and duties.

But perhaps it is the German tradition that comes closer to what today is considered as development economics. One reason, perhaps the main one, for this is the fact that in the middle of the 17th century Germany was one of the poorest countries in Europe. (More accurately, Germany then was a collection of poor countries in Europe.) Hence, "from its very inception, German economics was that of a backward nation attempting to catch up with its wealthier neighbours" (page 48, second volume). For this reason, possibly, the accent of German economics has always been on production. Also the German tradition gave a wider scope to economics than its Anglo-Saxon counterpart bringing into economic analysis history and geography, technology and governance, and social problems in general.

Consequently, while the Anglo-Saxons built their economics largely, if not exclusively, around exchange, thus reducing economics merely to catalectics, the Germans in their economic writings put the emphasis on the management of the economy - by evolving suitable institutions, through laws and regulations, using taxes and duties. This meant also that the state figured prominently in German writings on economics as an important facilitator. "The state is seen as something through which rather than against which individual liberty and progress are gained within the framework of a common weal" (page 51, second volume). The Germans were the first to recognise that promoting manufacture did not have to be at the expense of agriculture, but quite the contrary.

It is not surprising, therefore, that later German economists such as Friedrich List became champions of economic development via industrialisation through state-supported measures, including protective tariff. But it must be noted too that the idea was not to promote industrialisation as a public enterprise; private banks in Germany too provided full support for industrial growth.

These accounts show that development economics was not `born' in the mid-20th century, but has had a long and rich tradition. In fact, economics initially, or political economy as it was known for long, was development economics with reference to particular periods and regions. It was the universal `physico-mathematical science' of economics (as the French engineer-turned-economist in the second half of the 19th century claimed he was after) which dumped a great deal of real-life content for convenience of analysis that was the latecomer.

The third volume on pioneers of development economics complements the discussion in the second. As already noted, it has an account of Petty and his claim to be the pioneer of British development economics. Other essays refer to List's Infant Economy Argument; Karl Marx's manifold contributions to development economics with special reference to `primary accumulation of capital'; V.I. Lenin's treatment of the agrarian question; J.M. Keynes' emphasis on investment, entrepreneurship and the role of the state; Nicholas Kaldor's elaboration of Keynesian macroeconomics and articulation of its implications for development policy; Alexander Gerschenkron's analysis of late industrialisation; Raul Prebisch's treatment of Latin America in the `centre versus periphery' schema; Arthur Lewis' dual economy model; Hans Singer's sustained fight for distributive justice. These are all quite familiar names and themes, but in practically all essays there are fresh insights.

Not many may be equally conversant with the Polish economist Michael Kalecki's works that anticipated the Keynesian `revolution' and his insistence that the basic condition for breaking out of economic backwardness was a substantial increase in agricultural output. Karl Polanyi is not usually listed among development economists, but those who know his contribution to the understanding of the working of pre-capitalist and even pre-market economies and his treatment of the emergence of the `market economy' in his classic The Great Transformation will know that his inclusion is more than justified. Some may wonder whether Alfred Marshall, the great neo-classical economist, is also among development economists. But Marshall was a great believer in progress and had dealt with increasing returns to scale and external economies that figure in development economics prominently.

Two essays in the third volume deserve special attention, both by Indian scholars Utsa Patnaik and Prabhat Patnaik. (Other Indian contributors to this volume are Amiya Kumar Bagchi on Keynes and Kaldor, C. P. Chandrasekhar on Gerschenkron, and Jayati Ghosh on Kalecki.) Utsa Patnaik has a refreshingly critical account of Ricardo's theory of comparative advantage in international trade (based on his illustration of trade between England and Portugal of cloth and wine) which forms the basis of the arguments for free trade based on economic considerations as the soundest path to development.

But the argument that free trade is beneficial to both parties rests, points out Utsa Patnaik, on the crucial assumption that both goods are producible in both countries, which, however, is only a special case. The Ricardian theory is not applicable when this restrictive assumption does not hold. Such indeed was the case during the period when metropolitan countries traded with their tropical colonies in goods such as tea, coffee, rubber and sugar, which could not possibly be produced in the former. The bearing of this clarification on the `development through trade' argument during the past as well as the present is obvious.

Prabhat Patnaik in his paper "Why `Development Economics'" (which is the only paper in all the three volumes that examines the rationale of development economics) says: "We may study a set of topics that we may still conveniently refer to as `development economics', but we can do this properly only when the distinction between `economics' and `development economics' has been superceded by a totality of the capitalist system." Also, "developed and underdeveloped countries together constitute the totality of capitalism" (both on page 6, third volume), a significant, but bound to be contested observation.

The three volumes together provide a refreshingly different fare on development economics of the past and the present and deserve to be highly commended on that score.

But the crucial issue is which way development economics should move forward. On this the volumes are rather disappointing. For one, the foundational theme that Prabhat Patnaik put forward is not pursued by Patnaik himself or any other contributors or editors even though it is a topic relevant for the past, present and future. There are occasional references to it as, for example, in the `centre versus periphery' discussion of Prebisch and the Latin American economists. But in view of the generally recognised position that pre-capitalist economies were not growing economies (while development is not identical with growth, sustained development is not possible without growth of output) and that growth is central to capitalism, several questions arise.

As today all developed economies are capitalist economies, are the present-day underdeveloped economies those that for whatever reason did not experience the capitalist transformation? Or, are they underdeveloped because capitalism is underdeveloped in them or remain retarded? If so, why? And does that mean that for the sake of development they should go in for rapid capitalist transformation? Did capitalism in the past develop some economies while simultaneously underdeveloping some others? Is it in the very nature of capitalism to bring in such uneven and differential development? If so, is it happening even today? Is that what `global' capitalism is doing? If that is the case, what post-capitalist order is required and feasible that will ensure that development is a reality for all people in all parts of the world? Without an honest encounter with these issues - and one must insist that the treatment should be as empirical as possible taking into account the diversity of development situations over time and in different parts of the world - it will not be possible to take development economics forward.

But perhaps this was not the intention of those responsible for the production of the volumes. However, they have to be faulted on one major issue. By misidentifying the contemporary context of development economics they have possibly put it on the wrong track. The context they have indicated consists of the rise and fall of the Washington Consensus, the alleged paradigm shift, the emergence of New Development Economics - that is, the realm of thought and of competing prescriptions for development. The editors and most of the contributors appear to have taken the view that the task of authentic development economics today is to expose the fallacies of these high-sounding but unsound positions.

However, consider the present context to be different. Identify it as the situation arising from a global realignment of economic and political power bases; unprecedented technological changes rapidly altering agriculture, manufacturing, services and trade, resulting in changes in legal arrangements and institutional structures within which and through which the economy functions; and the impact of these on the lives and livelihoods of ordinary people within and across countries.

Surprisingly, there is hardly any reference to these themes in the three volumes. If these were to be taken as the contextual issues at the turn of the 21st century, the agenda for development economics would have been perceived to be totally different.

To adopt the phraseology used by the editors themselves, having decided to go into battle, they fell into the trap of engaging the adversary in theatres they were cunningly drawn into. It is not difficult to anticipate how the fight will proceed or what the outcome will turn out to be.