Understanding economic development and demolishing neoliberal development myths

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By Erik Reinert, Jayati Ghosh and Rainer Kattel

We have recently co-edited a book (The Handbook of Alternative Theories of Economic Development, Edward Elgar 2016, also available as an e-book on http://www.ebooks.com/95628740/handbook-of-alternative-theories-of-economic-development/reinert-erik-s-ghosh-jayati-kattel-rainer/) that seeks to bring back the richness of development economics through many different theories that have contributed over the ages to an understanding of material progress. The underlying approach is based on this quotation from nearly four centuries ago: “There is a startling difference between the life of men in the most civilised province of Europe, and in the wildest and most barbarous districts of New India. This difference comes not from the soil, not from climate, not from race, but from the arts.” (Francis Bacon, Novum Organum, 1620)

For centuries, economics was at its very core an art, a practice and a science devoted to ‘economic development’, albeit under a variety of labels: from an idealistic promotion of ‘public happiness’ to the nationalistic creation of wealth and greatness of nations and rulers, and the winning of wars. In some sense, until about 100 years ago, most economists were ‘development economists’. But during the process of formalization of economics into neoclassical economics in the post-World War II period, development economics slowly disappeared from the economic mainstream. ‘Where are their models?’ was one famous battle cry. For example, Jacob Viner made a key contribution to the demise of development economics by removing a fundamental force of uneven development – increasing returns – from international trade theory, on the account that it was not compatible with equilibrium. What would have been more logical would have been to remove equilibrium from economic theory because it is not compatible with an analysis of the real world. Economists’ choice of tools came to trump their interest in reality. Equilibrium became virtually the only game in town.

Thus economics developed into what we could call a tool-driven profession: the kind of information the tools could handle came to determine the development of the profession. And the focus in matters of development shifted from economic development to ‘poverty alleviation’, that is, from eradication of poverty by increasing the personal income of individuals to alleviating the symptoms of poverty. This shift in emphasis reflected the perception which had become increasingly widespread within the mainstream economics profession: that all answers to basic economic queries for all types of countries – developed, developing and underdeveloped – could come from the same neoclassical analytical framework which privileged the market mechanism. This approach remains firmly entrenched in the methodological individualism that characterizes 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 semi-formal rural credit markets or a developing economy engaging in international trade.

The associated focus on poverty alleviation has involved a much sharper focus on the micro, on the miniature as a supposedly useful and relevant representation of the larger reality. It is very much a product of the 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 reflects a deep internalization of the basic axioms of mainstream North Atlantic economic thinking, especially in terms of the dominance of the neoliberal marketist paradigm. As a result, the economics profession – and development economics in particular – is increasingly faced with a trade-off between relevance and accuracy.

Rescuing development economics from the miasma created by the discourse on poverty alleviation requires recognising that the process of development is an evolutionary one in which there is a continuous interplay of various forces; that economic outcomes reflect social and historical factors, the level and nature of institutional development, relative class and power configurations; and that the processes of production and distribution inevitably involve the clash of class interests along with the interaction of social, historical and institutional factors. Fortunately, there is a rich literature that has actually grown along these lines, much of which is unfortunately unrecognized and ignored by the mainstream profession and by those engaged in policy.

In putting together this volume, we attempted to correct for what we see as existing biases in present-day theoretical understanding of economic development. These exist in addition to the relatively ahistorical approach that is now so common. Apart from the obvious Eurocentric bias, even the orthodox historical record that is handed down to today’s scholars has a strong bias towards an English-based understanding of economic theory, and a strong German-based understanding of the role of religion. Thus, a massive two-volume work on economic development edited by two World Bank economists, the 1988 Handbook of Development Economics, devoted a chapter to the history of ideas of economic development. With the exception of Irish-born Richard Cantillon, who wrote in French, the chapter in question – written by the celebrated development economist W. Arthur Lewis – only contains references to works originally written in English by people living in the United Kingdom. It is written as if only authors who originally wrote in English, and were from England, have anything valuable to say about economic development. Similarly, there is the historically unfounded idea that economics owes its origins to Francois Quesnay and the eighteenth-century French Physiocrats whereas the fact is that the Physiocrats lost all battles in history, except the one in the economics textbooks.

So we have tried to correct these existing imbalances: the Eurocentric imbalance geographically, the Anglocentric one in development, the Protestant-centred one in religion, and the Physiocracy-based family tree of economics. We set out to revive and explore the alternatives: theories and approaches that over a long period of time have existed as alternative courses of policies and actions to those emanating from today’s mainstream and neoclassical theories, theories much older and better tested than those based on the economics of David Ricardo and on the idea of equilibrium. Our selection is problem-driven rather than driven by the available tools, and also based on a variety of methods.

We were fortunate in being able to persuade fifty of the finest scholars from all continents to contribute to this study, encompassing forty chapters that provide a range of analyses spanning different geographies, historical periods and theoretical approaches, coming down to contemporary debates. The subject matter is approached from several complementary perspectives. From a historical angle, there are discussions of the mercantilist and cameralist theories that emerged from the Renaissance and developed further during the Enlightenment, including the early discussion of increasing returns in the work of Antonio Serra and others. The German Historical School and the tradition created by Friedrich List are considered in detail, along with other European approaches. It is shown how the history of European economic policy has been dominated by emulation – attempting to copy the economic structure of the wealthiest countries – and only later was the principle of comparative advantage adopted.

From a geographical angle, we have tried to cast the net as widely as possible. Two chapters consider economic development from a Chinese angle, one contrasting European and Chinese production of science and knowledge, and the other depicting China’s imperial political cycles as failing to escape out of a fundamentally agricultural society; both referring to the lack of productive diversity as a reason for China falling behind Europe. There is a fascinating historical account of the interaction of the Islamic world and capitalism, which also critiques the misleading interpretation of Max Weber. There is a description of how Turkish thinkers in the 19^th and early 20^th centuries adapted List’s approach to what became the Ottoman School of economics. A synoptic overview of Indian development thinking moves from the framework outlined in the Arthasastra of Kautilya in the second century AD all the way to post-Independence approaches to development up to the late twentieth century. The main contributions of Latin American structuralism to the theory of economic development are reviewed. Two chapters are concerned with African approaches to development, revisiting the debate on national autonomous development in Africa and considering the fate of the idea of national development as liberation.

In the next section, there are analyses of how the problem of development was formulated in international terms over the twentieth century until the backlash created by the Washington Consensus, in discussion of the League of Nations, the Havana Charter just after World War II, and on the UNCTAD system of political economy as it developed over the second half of the twentieth century.

This is followed by a section devoted to different analytical approaches to development, as expressed both in particular schools of thought and in the work of a few selected scholars. There is a consideration of how Marxist thinkers have analysed the genesis of underdevelopment, the post-decolonization trajectories of development in the underdeveloped economies, and the impact of neoliberalism on these economies. Schumpeterian and evolutionary approaches to development are assessed, along with a summary of the key arguments by the so-called development pioneers working in the aftermath of World War II, such as Paul Rosenstein-Rodan, Hans Singer, Arthur Lewis, Albert Hirschman, Gunnar Myrdal and Ragnar Nurkse. Particular schools of thought are also considered; the relationship of régulation theory to development; the ‘dependency school’ in Latin America; feminist approaches to development. Three major scholars who contributed significantly to the understanding of the process of development as well its uneven trajectories are considered individually: Christopher Freeman, Albert Hirschman and Michal Kalecki.

Then there are specific discussions of varied issues in development thinking: the agrarian question; the financing of development at both national and international levels; development planning, which gained ascendancy in the period immediately after World War II when decolonization led to the emergence of a number of newly independent underdeveloped countries. Scandinavian countries have come to epitomize development success stories, the route these countries took over the course of the past two centuries is charted. Competitiveness is one of the ubiquitous terms that is laden with normative assumptions; the relationship between competitiveness and development is discussed from a Schumpeterian perspective. This is followed by bringing innovations systems theory, one of the more potent outgrowths of Schumpeterian theory, into the context of development. This allows for a contextualization of China’s rise within the discussion of latecomer development, along with a more general description of the evolution of the concept of the developmental state.

Specific facets of development that have recently become prominent concerns are considered next. In bringing up the issue of the ecological constraints, there is a challenge to the widespread perception of poverty–environment relationships in developing economies which holds that because many of the poor people in developing regions are located in fragile environments, they must be responsible for the majority of the world’s ecosystem degradation and loss – even though their livelihoods are directly affected by such environmental destruction. The connections between competition, competition policy, competitiveness, globalization and development are explored. The fundamental changes that have taken place in the field of intellectual property rights and regulations over the last three decades are identified, along with an analysis of the key importance of legal structures in development. Finally, there are discussions of the more negative experiences of development: de-industrialisation, industrial extinction (such as in some post-Soviet states) and its social and security consequences; and the utopias and dystopias facing us all over the coming years.

Overall, we have tried to capture the richness of the alternative, often ignored and sometimes misunderstood ideas which, in different historical contexts, have proved to be vital to the improvement of the human condition.

From: pp.10-12 of WEA Commentaries 7(1), February 2017
https://www.worldeconomicsassociation.org/files/Issue7-1.pdf

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