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Poverty can be defined by 'the condition of having little or no wealth or few material possessions; indigence, destitution' and is a growing area within development studies. In time for The Development Studies Association annual conference taking place in Oxford this year in September, we have put together this reading list of key books on poverty, including a variety of online and journal resources on topics ranging from poverty reduction and inequality, to economic development and policy.

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The United States is far from perfect. But China still lacks an independent legal system, adequate protection of human and labor rights, genuine freedom of expression, and predictable means to address grievances. Until such reforms can be accepted in Beijing, resentment will continue to rise and China’s smoldering volcano may eventually erupt.

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Countries grow richer as one moves away from the equator, and the same is generally true if one looks at differences among regions within countries. However, this was not always the case: research has shown that in 1500 C.E., for example, there was no such positive link between latitude and prosperity. Can these irregularities be explained? It seems likely an answer can be found in factors strongly associated with latitude.

The post Climate and the inequality of nations appeared first on OUPblog.

The United States faces a paradox: being on the cutting edge of technology seems to have in recent years only a marginal effect on job creation. The history books and our traditional economic theories seem to have failed us – whereas before, technological revolutions usually led to tremendous growth in both GNP and employment, now, on the eve of some of the most impressive innovations we’ve ever seen, the economy and employment are recovering since the 2008 “Great Recession” at the slowest rate since the Depression.

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Policies aimed at fostering economic growth through public expenditure in tertiary education should be better aware of the different contribution of each specific academic discipline. Rather than introducing measures affecting the allocation of resources in the broad spectrum of academic knowledge, policies might instead introduce ad-hoc measures to foster specific disciplines, for example through differentiated enrollment fees for students.

The post Academic knowledge and economic growth appeared first on OUPblog.

Must economic growth be privileged over ecological security? Jairam Ramesh argues that this is the wrong question to ask; the two work in concert, not in opposition, and a bright economic and political future requires a safe, protected environment. As India grows as a global power, the nation has become a leader in progressive environmental policies.

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In times of economic crisis, politicians and analysts alike are typically quick to call for structural reforms to stimulate economic growth. Job security regulations are often identified as a policy area in need of such reforms. These regulations restrict the managerial capacity to dismiss employees to allow for downsizing or to replace workers and use new forms of employment such as fixed-term contracts when hiring new workers. Mainstream economics typically blames such regulations for the sclerosis of European labour markets, in particular in southern Europe. But so far, European countries have mostly failed to reform dismissal protection – despite the economic crisis and pressure from international organizations. Why are these regulations so difficult to reform (i.e. dismantle)?

The easy answer is, of course, that some powerful groups, in particular trade unions, oppose these reforms. However, opposition to reform is costly, and unions have been under massive political pressure in recent years to assent to such structural reforms. Why are unions so adamantly opposed to structural reforms and in particular the reduction of dismissal protection in case of open-ended contracts? What is so special about these regulations?

Job security regulations are more important to trade unions than one might think at first sight. In fact, trade unions have at least three reasons to fight the reform of dismissal protection in case of open-ended contracts. The first reason is rather straightforward: unions need to represent their members’ interest in statutory dismissal protection. The two other reasons, however, are often overlooked: unions have an organizational interest in retaining dismissal protection because these regulations prevent employers hostile to trade unions from singling out union members in workforce reductions. Put differently, protection against arbitrary dismissal also involves the protection of the local union organization against anti-union employers. In addition, unions have an interest in protecting their involvement in the administration of dismissals because this involvement allows them to influence management decisions at the company level. In many countries, job security regulations give trade unions important co-decision rights in case of dismissals (e.g. Swedish regulations award unions the right to co-decide the selection of workers in case of dismissals for economic reasons). Put simply, job security regulations often make unions relevant actors in the workplace.

Of course, these three reasons don’t have the same weight in all European countries. For instance, the fear of employers hostile to unions is probably more important in southern European countries characterized by conflictual industrial relations (in most of these countries, employers were not required to recognize local union representations before the 1970s), while the involvement in the administration of dismissals is particularly important in countries characterized by long traditions of cooperative industrial relations (e.g. Germany and Sweden). Everywhere though, unions have sufficient reason to fight any reform of dismissal protection.

Facing such union resistance, governments have typically resorted to the deregulation of temporary employment. Unions have been more accepting of such two-tier reforms because temporarily employed workers are underrepresented among the union rank-and-file and because in the case of temporary employment unions have no organizational interests to defend. The deregulation of temporary employment (while the protection awarded to workers on open-ended contracts has remained more or less constant) has become a prominent example of so-called dualization processes, which are characterized by a differential treatment of workers in standard employment relationships (‘insiders’) and workers in more precarious employment relationships (‘outsiders’). Arguably, in some countries like Italy, the share of workers benefitting from (overly?) strict dismissal protection is now lower than the share of workers benefitting from hardly any dismissal protection at all.

So where are we standing after about three decades of calls for structural reforms such as the deregulation of job security? The three aforementioned reasons for unions to oppose the reform of dismissal protection in case of open-ended contracts are still there. The average union member still benefits from these regulations, unions continue to be worried about employers taking advantage of collective dismissals to rid themselves of unionized workers, and the institutional involvement in the administration of dismissals continues to be an important source of union power – in particular in times of dwindling membership.

Today, however, unions have a fourth reason to oppose structural reforms. For three decades they have reluctantly assented to two-tier reforms only to be confronted with further calls for numerical flexibility. By now there are as many workers on precarious contracts as there are workers on regular open-ended contracts – in particular in the countries that are said to be in greatest need of structural reforms. Nevertheless, calls for reform focus almost exclusively on dismissal protection of workers on open-ended contracts rather than on measures to improve the lot of the disadvantaged young, women, or elderly on precarious contracts. You don’t have to be a radical Italian trade unionist to find this one-sidedness a little bit odd.

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For years, social scientists have wondered about what causes political development and what can be done to stimulate it in the developing world. By political development, they mean the creation of democratic governments and public bureaucracies that can effectively respond to citizens’ demands. Early in the Cold War era, most scholars were optimistic and assumed that political development would occur quickly and easily in the developing world. They expected that countries would democratize and that their governments would generate lots of state capacity to provide new public services. But, as time wore on, many observers came to realize that the process was often fitful.

Some scholars became convinced that countries faced inherent developmental tradeoffs. In the 1970s, Samuel Huntington and Joan Nelson — in a book titled No Easy Choice — warned that developing countries could not simultaneously sustain democracy and economic growth policies. They felt that democracy led to pressures for economic redistribution, which would impede growth, but also recognized that excluding people from democratic participation created turmoil. More recently, Francis Fukuyama (writing in the Journal of Democracy) concluded that countries couldn’t have a vigorous democracy unless their governments possessed significant state capacity. Herein lay a tradeoff: for a central government to uphold the rule of law — something necessary for a robust democracy — it has to concentrate power. But citizens in fledgling democracies often (justifiably) worry about governments holding too much power. Fukuyama suggested that political development was double-edged: implanting a strong democracy and building state capacity were in tension.

Around the time Fukuyama wrote his cautionary article, I set out to investigate how countries in the developing world had acquired state capacity in the past. I embarked on this research as American involvement in Afghanistan and Iraq was making one thing clear: it’s really hard to build functional and effective states. I thought case studies might clarify how some countries had historically generated state capacity through more organic means, which might be useful knowledge for policymakers wanting to build up weak or failed states today.

I studied six countries in Latin America and Africa — Argentina, Chile, Colombia, Ghana, Mauritius, and Nigeria — and discovered a striking pattern. I found that when each of them experienced their first major commodity boom (in commodities as diverse as cattle, copper, sugar, and wheat), there were groups involved in the production and marketing of these goods that asked their governments for similar things. They wanted the state to provide new transportation infrastructure and help them obtain finance, so they could enlarge their operations. The situation seemed like a “win-win”: exporters could expand their businesses, and governments would stimulate economic growth.

But, curiously, governments often spurned these requests. I found that only when exporters were part of the governing coalition — meaning they were closely allied with politicians — did the government assist them. This was the case in Argentina, Chile, and Mauritius. When exporters were politically marginalized, governments refused to help them. In fact, governments worked against them, taxing their goods heavily and redistributing that wealth into boondoggles. Governments in Colombia, Ghana, and Nigeria essentially chose to sacrifice economic growth in order to redirect export wealth to their political cronies. These choices had lasting consequences. Over the longer term, Argentina, Chile, and Mauritius built fairly capable states, while the other countries did not.

My professional self was elated by these findings, since researchers hadn’t emphasized this coalitional perspective to analyze state building. And yet I was troubled by what seemed to be a tradeoff present in my “success” stories. The countries that expanded their state capacity often did so repugnantly. The Chilean government invaded and “pacified” the lands of the Mapuche Indians. It then sold the land to established landed elites, who wanted to prevent others from ending their stranglehold on the country’s farmland. In Argentina, ranchers in Buenos Aires province got the government to go to war with the country’s other littoral provinces, where upstart ranchers were challenging the economic hegemony of Buenos Aires pastoralists. The government also launched a ghastly military campaign to subjugate Indian tribes that were preventing ranchers from moving their herds southward into Patagonia. And Mauritius created a legal labyrinth to harass people who had legally left the harsh conditions of sugar estates in search of a better life. The government intimidated many of them back onto plantations, where some historians liken the working conditions to slavery. State building came at the expense of the weak.

I wrestle with these findings because governments with considerable state capacity can do lots of good things, especially for the powerless. They can uphold the rule of law, ensure democratic accountability, and provide public goods, such as education systems and clean water. And weak or failing states are environments where insurgent and terrorist groups can flourish. So there are manifest reasons why we should want countries to expand their state capacity. Nevertheless, the lessons from my book do not translate easily into sensible policy, since state building was doubled-edged. I hope that state building doesn’t require a tradeoff between enhancing government capabilities and treating vulnerable groups fairly. But one thing is clear: state building is politically charged. Building effective states isn’t simply a technical endeavor, but a deeply political process — one with enduring consequences.

Featured image: USAID works with Nigerians to improve agriculture, health, education, and governance. By USAID Africa Bureau. Public domain via Wikimedia Commons.

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China has all but overtaken the United States based on GDP at newly-computed purchasing power parity (PPP) exchange rates, twenty years after Paul Krugman predicted: “Although China is still a very poor country, its population is so huge that it will become a major economic power if it achieves even a fraction of Western productivity levels.” But will it eclipse the United States, as Arvind Subramanian has claimed, with the yuan eventually vying with the dollar for international reserve currency status?

Not unless China battles three economic foes. One is well-known: diminishing marginal returns to capital. Two others have received less attention. The first is Carlos Diaz-Alejandro. Not the man, but the results uncovered by his research on the Southern Cone following the opening up of its capital account that culminated in a sovereign debt crisis and contributed to Latin America’s lost 1980s. If the capital account is liberalized before the domestic financial system is ready, the country sets itself up for a fall: goodbye financial repression, hello financial crash. The second is the “reality of transition”: rejuvenating growth requires hard budgets and competition to improve resource allocation and stimulate innovation, counterbalanced with a more competitive real exchange rate. This is the principal insight from the transition in Central and Eastern Europe (CEE), which was far simpler than anything China faces.

China was able to raise total factor productivity (TFP) growth as an offset to diminishing marginal returns to capital, especially after joining the World Trade Organization (WTO) in 2001, and faster growth was accompanied by a rising savings rate. But TFP growth is hard to sustain. Any developing country targeting growth above the steady state level given by the sum of human capital growth, TFP growth and population growth (the latter two falling rapidly in China) will find that its investment rates need to continually increase unless it can rejuvenate TFP growth. China’s investment rates have risen from around 42% of GDP over 2005-7 (prior to the global crisis) to 48% in recent years even as growth has dropped from the 12% to the 7.5% range. Savings rates have hovered around 50%, reducing current account surpluses (numbers drawn from IMF 2010 and 2014 Article IV reports).

This configuration has forced China to choose between either investing even more, or lowering growth targets. It has chosen the latter, with its leaders espousing anti-corruption, deleveraging, environmental improvement and structural reform to achieve higher quality growth. The central bank, People’s Bank of China (PBoC), has reaffirmed its goal of internationalizing the yuan and liberalizing the capital account.

China’s proposed antidote is to “rebalance” from investment and exports to domestic consumption. But growth arithmetic would require consumption to grow at unrealistic rates, given the relative shares of investment and private consumption in GDP, even to meet scaled-down growth targets. Besides, households need better social benefits and market interest rates on bank deposits to save less and consume more. Hukou reform alone, or placing social benefits received by rural migrants on a par with their urban counterparts, could easily cost 3% of GDP a year for the next seven years as some 150 million additional people gain access to such benefits—quite apart from the public investment needed to upgrade urban infrastructure, according to calculations shared by Xinxin Li of the Observatory Group. And the failure to liberalize bank deposit rates has led to the rise of “wealth management products” in the shadow banking system. These “WMPs” offer higher returns but are poorly regulated and more risky.

Indeed, total social financing, a broad measure of credit, has soared from 125% to 200% of GDP over the five years 2009-2013 (Figure 2 in the July 2014 IMF Article IV report, with Box 5 warning that such a rapid trajectory usually ends in tears). Local government debt was estimated at 32% of GDP in mid-2013, much of it short-term and used to fund infrastructure projects and social housing with long paybacks. Housing prices show the signs of a bubble, especially away from the four major cities. Corporate credit is 115% of GDP, about half of it collateralized by land or property. While the focus recently has been on risks from shadow banking, it is hard to separate the shadow from the core. Besides, WMPs have become intertwined with the booming real estate market, a major engine of growth yet the centre of a “web of vulnerabilities” (to quote the IMF) encompassing banks, shadow banks, and local government finances. A real estate shock would ripple through the system, lowering growth and forcing bailouts. The gross cost of the bank workout at the end of the 1990s was 15% of GDP in a much simpler world!

2014 began with fears of a hard landing and an impending default by a bankrupt coal mine on a $500 million WMP-funded loan intermediated by a mega-bank. The government eventually intervened rather than let investors take a hit and risk a confidence crisis. And starting in April, stimulus packages were launched to meet the 7.5% growth target, a tacit admission that rebalancing is not working. But concerns persist around real estate. Besides, stimulus will help only temporarily and China is likely to be facing the same questions about growth and financial vulnerability by the end of the year.

With rebalancing infeasible, and investing even more prohibitively costly, virtually the only remaining option is to spur total factor productivity growth: China is still far from the global technological frontier. This calls for a package that cleans up the financial sector and implements hard budgets and genuine competition, especially for the state-owned enterprises (SOEs), while keeping real exchange rates competitive. The real appreciation of the past few years may have been offset by rising productivity, but continued appreciation will make it harder for the domestic economy to restructure and create 12 million jobs a year to absorb new graduates and displaced SOE workers.

In sum, China must heed Diaz-Alejandro. No one knows what the non-performing loans ratio is in China and few believe the official rate of 1%. If the cornerstone of a financial system is confidence and transparency, China is severely deficient. This must first be fixed and market-determined interest rates adopted before entertaining hopes of internationalizing the currency. China must also accept the reality of transition; the formidable remaining agenda in the fiscal, financial, social, and SOE sectors reminds us that China is still in transition to a full-fledged market economy.

The combination of a financial clean up and the policy trio of hard budgets, competition, and a competitive real exchange rate will improve resource allocation and force innovation, boosting total factor productivity growth. But doing this is hard—that’s the essence of the “middle-income trap”. Huge vested interests will be encountered, evoking Raghuram Rajan’s description of the middle-income trap as one “where crony capitalism creates oligarchies that slow down growth”. Dealing with this agenda is the Chinese leadership’s biggest challenge.

The era of cheap China is ending, while the ability of the government to virtually decree the growth rate has fallen victim to diminishing returns to capital. Diaz-Alejandro and the reality of transition are no less important as China seeks a way forward.

Headline image credit: The Great Wall in fall, by Canary Wu. CC-BY-SA-2.0 via Wikimedia Commons.

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Quite abruptly income inequality has returned to the political agenda as a prominent societal issue. At least part of this can be attributed to Piketty’s provoking premise of rising concentration at the top end of the income and wealth distribution in Capital in the Twenty-First Century (2014), providing some academic ground for the ‘We are the 99 percent’ Occupy movement slogan. Yet, this revitalisation of inequality is based on broader concerns than the concentration at the very top alone. There is growing evidence that earnings in the bottom and the middle of the distribution have hardly risen, if at all, during the last 20 years or so. Incomes are becoming more dispersed not only at the top, but also more generally within developed countries.

We should distinguish between increasing concentration at the top and the rise of inequality across the entire population. Even though both developments might take place simultaneously, the causes, consequences, and possible policy responses differ.

The most widely accepted explanation for rising inequality across the entire population is so-called skill-biased technological change. Current technological developments are particularly suited for replacing routine jobs, which disproportionally lie in the middle of the income distribution. In addition, low- and middle-skilled manufacturing jobs are gradually being outsourced to low-wage countries (see for instance Autor et al., 2013). Decreasing influence of trade unions and more decentralised levels of wage coordination are also likely to play a role in creating more dispersed earnings patterns.

Increased globalisation or technological change are not likely to be main drivers of rising top income shares, though the larger size of markets allows for higher rewards at the top. Since the rise of top income shares was especially an Anglo-Saxon phenomenon, and as the majority of the top 1 per cent in these countries comes from the financial sector, executive compensation practices play a role. Marginal top tax cuts implemented in these countries and inherited wealth are potentially important as well.

So should we care about these larger income differences? At the end of the day this remains a normative question. Yet, whether higher levels of inequality have negative effects on the size of our total wealth is a more technical issue, albeit not a less contested one in political economy. Again, we should differentiate between effects of increasing concentration at the top and the broader higher levels of inequality. To start with the latter, higher dispersion could incite people to put forth additional effort, as the rewards will be higher as well. Yet, when inequality of income disequalises opportunities, there will be an economic cost as Krugman also argues. Investment in human capital for instance will be lower as Standard & Poor’s notes for the US.

High top income shares do not lead to suboptimal human capital investment, but will disrupt growth if the rich use their wealth for rent-seeking activities. Stiglitz and Hacker and Pierson in Winner-Take All Politics (2010) argue that this indeed takes place in the US. On the other hand, a concentration of wealth could facilitate large and risky investments with positive externalities.

If large income differences indeed come at the price of lower total economic output, then the solution seems simple: redistribute income from the rich to the poor. Yet, both means-tested transfers and progressive taxes based on economic outcomes such as income will negatively affect economic growth as they lower the incentives to gain additional wealth. It might thus be that ‘the cure is worse than the disease’, as the IMF phrases this dilemma. Nevertheless, there can be benefits of redistribution in addition to lessening any negative effects of inequality on growth. The provision of public insurance could have stimulating effects by allowing individuals to take risks to generate income.

How to leave from here? First of all, examining whether inequality or redistribution affects growth requires data that makes a clean distinction between inequality before and after redistribution across countries over time. There are interesting academic endeavours trying to decompose inequality into a part resulting from differences in effort and a part due to fixed circumstances, such as gender, race, or educational level of parents. This can help our understanding which ‘types’ of inequality negatively affect growth and which might boost it. Moreover, redistribution itself can be achieved through multiple means, some of which, such as higher heritage taxes, are likely to be more pro-growth than others, such as higher income tax rates.

All things considered, whether inequality or redistribution hampers growth is too broad of a question. Inequality at which part of the distribution, due to what economic factors, and how the state intervenes all matter a great deal for total growth.

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By Richard S. Grossman

As an early-stage graduate student in the 1980s, I took a summer off from academia to work at an investment bank. One of my most eye-opening experiences was discovering just how much effort Wall Street devoted to “Fed watching”, that is, trying to figure out the Federal Reserve’s monetary policy plans.

If you spend any time following the financial news today, you will not find that surprising. Economic growth, inflation, stock market returns, and exchange rates, among many other things, depend crucially on the course of monetary policy. Consequently, speculation about monetary policy frequently dominates the financial headlines.

Back in the 1980s, the life of a Fed watcher was more challenging: not only were the Fed’s future actions unknown, its current actions were also something of a mystery.

You read that right. Thirty years ago, not only did the Fed not tell you where monetary policy was going but, aside from vague statements, it did not say much about where it was either.

Given that many of the world’s central banks were established as private, profit-making institutions with little public responsibility, and even less public accountability, it is unremarkable that central bankers became accustomed to conducting their business behind closed doors. Montagu Norman, the governor of the Bank of England between 1920 and 1944 was famous for the measures he would take to avoid of the press. He adopted cloak and dagger methods, going so far as to travel under an assumed name, to avoid drawing unwanted attention to himself.

The Federal Reserve may well have learned a thing or two from Norman during its early years. The Fed’s monetary policymaking body, the Federal Open Market Committee (FOMC), was created under the Banking Act of 1935. For the first three decades of its existence, it published brief summaries of its policy actions only in the Fed’s annual report. Thus, policy decisions might not become public for as long as a year after they were made.

Limited movements toward greater transparency began in the 1960s. By the mid-1960s, policy actions were published 90 days after the meetings in which they were taken; by the mid-1970s, the lag was reduced to approximately 45 days.

Since the mid-1990s, the increase in transparency at the Fed has accelerated. The lag time for the release of policy actions has been reduced to about three weeks. In addition, minutes of the discussions leading to policy actions are also released, giving Fed watchers additional insight into the reasoning behind the policy.

More recently, FOMC publicly announces its target for the Federal Funds rate, a key monetary policy tool, and explains its reasoning for the particular policy course chosen. Since 2007, the FOMC minutes include the numerical forecasts generated by the Federal Reserve’s staff economists. And, in a move that no doubt would have appalled Montagu Norman, since 2011 the Federal Reserve chair has held regular press conferences to explain its most recent policy actions.

The Fed is not alone in its move to become more transparent. The European Central Bank, in particular, has made transparency a stated goal of its monetary policy operations. The Bank of Japan and Bank of England have made similar noises, although exactly how far individual central banks can, or should, go in the direction of transparency is still very much debated.

Despite disagreements over how much transparency is desirable, it is clear that the steps taken by the Fed have been positive ones. Rather than making the public and financial professionals waste time trying to figure out what the central bank plans to do—which, back in the 1980s took a lot of time and effort and often led to incorrect guesses—the Fed just tells us. This make monetary policy more certain and, therefore, more effective.

Greater transparency also reduces uncertainty and the risk of violent market fluctuations based on incorrect expectations of what the Fed will do. Transparency makes Fed policy more credible and, at the same time, pressures the Fed to adhere to its stated policy. And when circumstances force the Fed to deviate from the stated policy or undertake extraordinary measures, as it has done in the wake of the financial crisis, it allows it to do so with a minimum of disruption to financial markets.

Montagu Norman is no doubt spinning in his grave. But increased transparency has made us all better off.

Richard S. Grossman is a Professor of Economics at Wesleyan University in Connecticut, USA and a visiting scholar at Harvard University’s Institute for Quantitative Social Science. His most recent book is WRONG: Nine Economic Policy Disasters and What We Can Learn from Them. His homepage is RichardSGrossman.com, he blogs at UnsettledAccount.com, and you can follow him on Twitter at @RSGrossman. You can also read his previous OUPblog posts.

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By Morten Jerven

In most studies of economic growth the downloaded data from international databases is treated as primary evidence, although in fact it is not. The data available from the international series has been obtained from governments and statistical bureaus, and has then been modified to fit the purpose of the data retailer and its customers. These alterations create some problems, and the conclusions of any study that compares economic performance across several countries depend on which source of growth evidence is used.

The international databases provide no proper sources for their data and no data that would enable analysts to understand why the different sources disagree about growth. See, for example, the disagreement in economic growth series reported by the national statistical office, from Penn World Tables, The World Bank, and the Maddison dataset for Tanzania, 1961-2001.

The average annual disagreement between 1961 and 2001 is 6%. It is not evenly distributed; there is serious dissonance regarding growth in Tanzania in the 1980s and 1990s, and how the effects of economic crisis and structural adjustment affected theeconomy depends on which source you consult.

The problem is that growth evidence in the databases covers years for which no official data was available and the series are compiled from national data that use different base years. The only way to deal satisfactorily with inconsistencies in the data and the effects of revisions is to consult the primary source. The official national accounts are the primary sources.

The advantage of using the national accounts as published by the statistical offices is that they come with guidelines and commentaries. When the underlying methods or basic data used to assemble the accounts are changed, these changes are reported. The downside of the national accounts evidence is that the data is not readily downloadable. The publications may have to be manually collected, and then the process of data entry and interpretation follows. When such studies of growth are done carefully, it offers reconsiderations of what used to be accepted wisdom of economic growth narratives.

I propose a reconsideration of economic growth in Africa in three respects. First, that the focus has been on average economic growth and that there has been no failure of economic growth. In particular the gains made in the 1960s and 1970s have been neglected.

Secondly, for many countries the decline in economic growth in the 1980s was overstated, as was the improvement in economic growth in the 1990s. The coverage of economic activities in GDP measures is incomplete. In the 1980s many economic activities were increasingly missed in the official records thus the decline in the 1980s was overestimated (resulting from declining coverage) and the increase in the 1990s was overestimated (resulting from increasing coverage).

The third important reconsideration is that there is no clear association between economic growth and orthodox economic policies. This is counter to the mainstream interpretation, and suggests that the importance of sound economic policies has been overstated, and that the importance of the external economic conditions have been understated in the prevailing explanation of African economic performance.

We know less than we would like to think about growth and development in Africa based on the official numbers, and the problem starts with the basic input: information. The fact of the matter is that the great majority of economic transactions whether in the rural agricultural sector and in the medium and small scale urban businesses goes by unrecorded.

This is just not a matter of technical accuracy; the arbitrariness of the quantification process produces observations with very large errors and levels of uncertainty. This ‘numbers game’ has taken on a dangerously misleading air of accuracy, and international development actors use the resulting figures to make critical decisions that allocate scarce resources. Governments are not able to make informed decisions because existing data is too weak or the data they need does not exist; scholars are making judgments based on erroneous statistics.

Since the 1990s, in the study of economics, the distance between the observed and the observer is increasing. When international datasets on macroeconomic variables became available, such as the Penn World Tables, and the workhorse of study of economic growth became the cross-country growth regressions the trend turned away from carefully considered country case studies and then rather towards large country studies interested in average effects.

However, the danger of such studies is that it does not ask the right kind of questions of the evidence. As an economic historian, I approach the GDP evidence with the normal questions in source criticism: How good is this observation? Who made this observation? And under what circumstance was this observation made?

Morten Jerven is an economic historian and holds a PhD from the London School of Economics. Since 2009, he has been Assistant Professor at the School for International Studies at Simon Fraser University. He is author of Economic Growth and Measurement Reconsidered in Botswana, Kenya, Tanzania, and Zambia, 1965-1995 and has published widely on African economic development, and particularly on patterns of economic growth and economic development statistics.

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Image credit: Tanzanian farmers, by Fanny Schertzer. CC-BY-2.5 S.A via Wikimedia Commons.

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By Vladimir Popov

Development thinking in the second half of the twentieth century can hardly be credited for “manufacturing” development success stories. It is difficult, if not impossible, to claim that either the early structuralist models of the Big Push (financing gap and basic needs of the 1950-70s), or neoliberal ideas of Washington consensus (that dominated the field since the 1980s), have provided crucial inputs to economic miracles in East Asia or elsewhere. On the contrary, it appears that development ideas, either misinterpreted or not, contributed to a number of development failures. The USSR and Latin America of the 1960s-80s demonstrated the inadequacy of import-substitutions model. Later every region of developing world that became the experimental ground for Washington consensus type theories, from Latin America to Sub-Sahara Africa to former Soviet Union and Eastern Europe, revealed the flaws of neoliberal doctrine by experiencing a slowdown, a recession or even a severe depression in the 1980s-90s.

Neither development theories nor policies of multilateral institutions can be held responsible for engineering development successes. Japan, Hong Kong, Taiwan, Singapore, South Korea, South East Asia, and China achieved high growth rates without much advise and credits from International Monetary Fund (IMF) and the World Bank. Economic miracles were manufactured in East Asia without much reliance on development thinking and theoretical background — just by experimentation of the strong hand politicians. The 1993 World Development Report “East Asian Miracle” admitted that non-selective industrial policy aimed at providing better business environment (education, infrastructure, coordination, etc.) can promote growth, but the issue is still controversial. Structuralists claim that industrial policy in East Asia was much more than creating better business environment, whereas neoliberals believe that liberalization and deregulation should be largely credited for the success.

It is said that failure is always an orphan, whereas success has many parents. No wonder, both neoclassical and structuralist economists claimed that East Asian success stories prove what they were saying all along, but it is obvious that both schools of thought cannot be right at the same time. There is a lack of understanding why government intervention sometimes results in spectacular failures and what particular kind of government intervention is needed for manufacturing fast growth (2000 – onwards).

Why did a gap emerge between development thinking and development practice? Why were development successes engineered without development theories? Why did development theoreticians fail to learn from real successes and failures in the global South? It appears that development thinking in the postwar period went through a full evolutionary cycle — from dirigiste theories of Big Push, to neoliberal deregulation wisdom of “Washington consensus” (1980-90s), to the understanding that catch up development does not happen by itself in a free market environment.

The confusion in development thinking of the past decade may be a starting point for the formation of new paradigm. Without mobilization of domestic savings and industrial policies there may be no successful catch up development. National development strategies for countries at a lower level of development should not copy economic policies used by developed countries; in fact, it was shown more than once that Western countries themselves did not use liberal policies that they are advocating today for less developed countries when they were at similar stages of development.

Most development economists share the general principle that good policies are context dependent and there is no universal set of policy prescriptions for all countries at all stages of development. But when it comes to particular policies, there is no consensus. The future of development economics may be a theory, explaining why at particular stages of development (depending on per capita GDP, institutional capacity, human capital, resource abundance, etc.) one set of policies (tariff protectionism, accumulation of reserves, control over capital flows, nationalization of resource enterprises, etc.) is superior to another. The art of the policymakers then is to switch the gears at the appropriate time not to get into the development trap. The art of the development theoretician is to fill the cells of “periodic table of economic policies” at different stages of development.

The emerging theory of stages of development would hopefully put the pieces of our knowledge together and will reveal the interaction and subordination of growth ingredients. A successful export-oriented growth model à la East Asian tigers seems to include, but is not limited to:

• Building strong state institutions capable of delivering public goods (law and order, education, infrastructure, health care) needed for development
• Mobilization of domestic savings for increased investment
• Gradual market type reforms
• Export-oriented industrial policy, including such tools as tariff protectionism and subsidies
• Appropriate macroeconomic policy – not only in traditional sense (prudent, but not excessively restrictive fiscal and monetary policy), but also exchange rate policy (undervaluation of the exchange rate via rapid accumulation of foreign exchange reserves).

If this interpretation of development experience is correct, the next large regions of successful catch up development would be MENA Islamic countries and South Asia – these regions seem to be most prepared to accept the Chinese model. Eventually Latin America, Sub-Sahara Africa and Russia would be catching up as well. If so, it would become obvious in the process of successful catch up development that the previous policies that the West recommended and prescribed to the South (deregulation, downsizing the state, privatization, free trade and capital movements) were in fact  hindering rather than promoting their development.

Vladimir Popov is an adviser in the Department of Economic and Social Affairs of the United Nations and professor emeritus at the New Economic School in Moscow. He is the author and editor of 12 books and numerous articles that have been published in the Journal of Comparative Economics, Comparative Economic Studies, World Development, Post-Communist Economies, New Left Review, and other academic journals, as well as many essays in the media. His most recent book is Mixed Fortunes: An Economic History of China, Russia, and the West.

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