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What is Development Economics?

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Development economics can be seen as a branch of economics that deals largely with the economics of low income countries and their process of development. It is concerned with the “efficient allocation of scarce productive resources” and the “economic, social, political and institutional mechanisms… to bring about rapid and large scale improvements in the levels of living.” Development not only refers to an increase in gross national income, but includes other relatively less quantifiable variables such as improvements in healthcare, workplace, human rights and other measure of the standard of living.

However, development economics is not the mere extension of traditional economic analysis towards developmental issues. It differs from traditional economics in terms of methodology and assumptions.

In terms of methodology, Hirschman highlights that development economics is defined by the “rejection of the monoeconomics claim and the assertion of the mutual benefit claim”. As such, development economics opposes the view that there is only one kind of economics that can be universally applied. This implies that developing counties differ from developed countries in a few crucial characteristics that would require separate theories. Another tenet of development economics is that trade between developed and developing countries is mutually beneficial and the former can aid in the development of the latter.

In terms of assumptions, a key difference is that development economics also incorporates social and political institutions into its economic analyses by presuming a number of market failures that would result in a misallocation of resources. It is a policy science with a larger role for the government to play in order for economic development to occur, for instance in jumpstarting industrialization, as opposed to what classical economic theory would prescribe.
The existence and utilities of development economics can be justified most strongly by the argument that developing and developed countries have distinct characteristics that need to be accounted for differently in theory. For instance, developing countries were characterized by widespread rural unemployment, leading them to be stuck in a poverty trap, with low equilibrium levels, and late industrialization, which required a deliberate, intensive, guided effort. Early development economics also argued that more state intervention was required in developing countries because their markets fail more dramatically and frequently. Such differences in developing countries would require different economic analyses and policy prescriptions from that of developed countries.

In addition, development economics would allow us to focus on the diversities between developing and developed countries. Within the monoeconomic framework of traditional neoclassical economics, we would focus only on common factors which we have indentified in developed countries while examining developing countries. Rostow’s economic stage of growth outlines five stages of economic growth which are common to all countries. Conversely, Gershenkorn observed that factors which were seen as prerequisites of growth in developed countries were almost non-present at all in developing countries and proposed an alternative view of industrialization with an emphasis on the role of institutions.

Hence, development economics aids us in explaining reality better. The purpose of theory is to simplify the complex linkages of reality into a sequence of causality which the human mind can comprehend. Traditional neoclassical economics, with its’ ceteris paribus assumptions and assumptions on rationality amongst other assumptions, suffices as a broad theory which can be applied to a variety of markets and situations if these assumptions hold. Yet it is precisely this which oversimplifies reality. The utility of development economics lies in it allowing us to separate developing countries and observing their characteristics within a framework that draws our attention to the multidimensional view of development.

Moreover, development economics fulfilled a historical function in placing economic development on the agenda of policy makers. The differences from developed countries encouraged a greater role for the government to play in developing countries. Through its’ mutual benefit claim, development economics also encouraged aid from developed countries to developing countries.

Despite the utility of development economics, it faced a decline in the 1970s and 1980s. Even with government intervention, developing countries were not developing as they should, nor was convergence achieved. This led to critiques on development economics. Neo-Marxists condemned developmental policies as the exploitation of developing countries which led to polarization effects and income disparities while neo-Classicals argued that government intervention resulted in too much misallocation. Hirschman suggests two main reasons which were instrumental in forestalling a reply towards these attacks.

Firstly, there was the increasing diversity of developing countries. The theories of development economics were intended for a typical developing country, yet developing countries differ greatly in terms of population composition, availability of natural resources, dependence on agriculture, and social and political institutions. When policy recommendations suggested by development economics were applied, there were varied results in these developing countries, thus undermining the ability of development economics to formulate a unified theory applicable to all developing countries. For example, South East Asia achieved astounding economic growth and increases in national income but this was not replicated to the same extent in Latin America or Africa, which remained poor. This pushed development economics towards formulating a universal set of policy goals such as the Washington Consensus which could be applied to all countries.

Secondly, development economics had presumed that increasing national income would naturally solve social and political problems. Instead, it appeared to be followed by “development disasters” such as “civil wars” and “murderous authoritarian regimes” in developing countries. Economic development was driven not only by economics but by political forces as well, resulting in the inability of pure economic analysis to provide solutions to developmental issues. In addition, these government failures were seen to be more severe than the market failures, leaving development economists disillusioned. This had an opposite effect on development economics and it turned towards specialized technical tasks and focused on issues such as basic needs for the very poor countries instead of overall developmental strategies.

However, development economics still remains relevant and valid today. Development economics can make methodological improvements to incorporate the observed diversities among developing countries. Shin suggests that development economics should move towards the path of hetero-economics by focusing on a few countries and developing a combination of theories to highlight and explain the impact of these diversities. In doing so, the explanatory power of development economics can be further improved. Thus, the diversity which Hirschman saw as fatal for development economics need not be a limit on the potential of development economics.

In addition, while development economics may not be able to account for all the diversity among developing countries, neoclassical economics does not fare much better when applied towards developing countries. According to Chang, the implementation of neoclassical policies has also led to “growing inequality, intensified social tension… and other ‘social problems’”. In contrast, the growth of China and India may also suggest that government intervention may have a more important role in economic development than what neoclassical economics prescribes. The persistent failures of the application of neoclassical economics indicate that development economics, with its emphasis on characteristics of developing countries, may provide more relevant policy implications.

Development economics provides a better approximation to reality. Shin acknowledges this, but concedes that universal theories remain dominant due to lack of a unified methodological structure of development economics. He lays out a possible methodology for development economics to deal with diversity in causality. General theories based on universal factors are to be further refined to take into account of the economies to form second-stage theories. While this reduces the overall applicability of the resultant theory, what we gain in terms of a better approximation of reality and a better understanding of causality would compensate for this loss of generality.

As such, one would disagree with Hirschman’s views on the decline of development economics. Time has shown us that neoclassical economics is not necessarily more effective than development economics in averting developmental disasters or promoting economic development. The diversities that have once torn development economics apart can be reworked and re-incorporated into a hetero-economics framework. This sets out an alternative direction for development economics to move along in the future and should re-establish faith in development economists that the subject is still relevant and useful.

JC ECONOMICS ESSAYS: Special thanks to Y YL.

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