The Hindu Business Line : A brief history of development economics

An economist's answer to the question `how to promote growth' has substantially changed over time. Looking at the evolution of ideas on development and poverty shows that, more often than not, accepted models of development are challenged by new information on what works and what does not in specific contexts.

THE greatest challenge before policymakers in developing countries is eradicating poverty. One way is to redistribute wealth. There are two problems with this solution. In Communist countries, such as the former Soviet Union and China, this was achieved by confiscation of property (land and factories) owned by the non-poor.

First, redistribution of the national pie may affect its future size by producing negative incentive effects. Growth and equity could come into conflict.

Second, confiscation leads to violence, which inturn disturbs social harmony and deprives many of their fundamental right to life and property. Thus, this idea has been discarded by all democratic countries.

It is now generally agreed that a high GDP growth rate is necessary for any sustainable reduction in poverty. At best, growthenhancing policies may be combined with redistribution of land and other assets through constitutional means (mainly taxes, subsidies and programmes targeted at the poor).

So, the question boils down to: How to promote growth. An economist's answer to this question has substantially changed over time.

The 1950s and the 1960s were the golden age of national planning, which was influenced by the success of the erstwhile Soviet Union of achieving a high rate of GDP growth through rapid industrialisation.

There was major investment by the state in heavy industries and defence, while production of consumer goods was neglected. The common people were asked to sacrifice current consumption for a much higher standard of living in the future.

Many development theorists came up with models to justify this strategy for growth. Particularly noteworthy were the so-called Feldman-Harrod-Domar model and the home-grown Mahalanobis model. But with the collapse of economies in the Soviet Union and East Europe, scepticism grew about public sector-driven growth. Fatal blows to central planning was delivered by the break-up of Soviet Union and adoption of "market socialism" by China.

Concurrently, the attention of development economists shifted from state-sponsored planning to more market-friendly policies. The focus was now on creating an investment-friendly atmosphere that would, it was believed, promote growth through private investment.

The state's role would be concentrated in the areas of physical (transport, power, communication) and social infrastructure (basic education, health-care, social security). The creation of new productive job opportunities would benefit the poor. Growth and sustained reduction of poverty would thus be driven by the market. The state would be the facilitator in the process.

It was also recognised that poverty reduction had many dimensions — social justice, gender issues, opportunities and a social safety net to take care of the unemployed, the old and the infirm.

The World Bank and the International Monetary Fund (IMF) became the principal agencies pushing this new model of development throughout the developing world by persuasion and pressure.

Unlike older theories that emphasised capital accumulation, the focus on investment climate pays more attention to what is required in the realm of entrepreneurship, productivity and investment — both public and private. It included prescriptions for appropriate governance, building infrastructure, institutions, education and skill formation.

The theory underlined the need for macro stability (low government deficit and low inflation) and an open trading environment to take advantage of global opportunities.

Many studies were undertaken on the problems faced by enterprises in developing countries. Micro-management issues were given the same importance as those of macro-management. The process of development became the focal point of research.

The role of international institutions also changed.

Resource transfer to developing countries through concessional aid was becoming less important. The primary role of international agencies became one of promoting policies that accelerate development and poverty reduction by serving as `agents of change', helping developing countries change the way the processes work in public and private sectors.

Though the role of external liberalisation was emphasised in theory, economists were not entirely sure of how exactly an open economy raises the rate of growth.

Some believed that FDI, not trade as such, was a more reliable driver of economic growth, especially where adequate local skills were available.

In that connection, the crucial role of developing an educated labour force through enhancing the reach and the quality of education (particularly technical education) was highlighted.

It was also felt that rather than researching global inequality, it was more beneficial to focus on ways to avoid or mitigate the undesirable consequences of inequality.

Equality of opportunity, rather than the outcomes, became the buzzword.

A lot of emphasis is now placed on empowering the poor. Participatory democracy at different levels, especially at the village and panchayat levels, is the key. Food for work and other such public works programmes can at best be short-term palliatives. The longer-term solution lies in capacity building among the poor.

The gramin bank model (successfully implemented in Bangladesh) has now become part of development economics and is the new development paradigm that is favoured by the IMF and the World Bank. The role of civil society (NGOs in particular) in organising the poor and fighting for their rights is receiving a great deal of emphasis.

A participatory process involving government, international institutions, regional development banks, civil society and the private sector is now challenging the established wisdom coming from the top. It is now agreed that the World Bank and the IMF do not have the expertise in every aspect of development.

Development strategies, programmes and policies need to be country-based and, even more important, country-owned.

For example, a successful model that has worked in a country situated on an important sea route (such as Singapore) may not be effective for a land-locked country (such as Nepal).

The role of the World Bank and the IMF has been reduced to that of a general practitioner who has an overall view of the health of a country or region.

Even this brief history of the evolution of ideas on development and poverty shows that, more often than not, accepted models of development are challenged by new information on what works and what does not in specific contexts.

(The author is Professor of Economics, Indian Institute of Management Calcutta, and visiting professor of Economics, University of Rochester, US. Feedback may be sent to alokray15@yahoo.com)

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