SUMMARY The significance of development economics

Naqvi, S.

Professor Naqvi (1996) discusses the significance of development economics based on the

fundamentals concepts and the main critics against this economic field. He understand that

the purpose of development economics is “to isolate the elemental forces at work in

developing countries that raise per capita income, initially and then continuously, by exploiting

fully the inter-industry and inter-sectoral network of economies of scale, externalities, and

complementarities; it also analyzes the key factors that decide a fair distribution of the fruits of

economic progress, and those which enhance human happiness more directly”. This definition

seems to be aligned with the fundamentals of the economic science itself. However this

economic field is criticized by many authors in terms of its protectionism, its potential of

inefficiency of markets, its inward looking and its macro-oriented rather than micro-oriented

approach.

No other economic field has monopoly on the explanation of the development progress and

on the application of strategies to increase the rate at which the countries develop. Four

dimensions are identified on the field of development economics:

1. “Stylized facts or the «regularities» of the development process over time and across

couantries”. Physical accumulation, industrialization, trade and human capital

formation

2. Structural transformation which is the moving of resource from one type of economic

activity to others that usually have a higher marginal productivity, capital

accumulating capacity and added value.

3. Economic wide dimensions. it is related to the understanding of different perspectives

on the development process. It analyzes the «dynamics» of the system related to

structural transformation, trade, human capital formation, health, accumulation,

literacy etc.

4. Experience of high-growth economies. It is based on the experienced of modern

economies the way in which their macroeconomic stability and growth in GDP are

related to distributive justice and a virtuous development circle.

The paper gives some highlights about the rival neoclassical theories. The Harrod model which

pays attention to population (labor) growth, savings rate and the capital/output ration as

variables of growth. Solow-based models which add technological change into the variables

and predict a no-growth equilibrium at the same technological conditions for every economy.

The long-run growth then will depend on technological change exclusively while the

technological process depend on the distance to the world’s technological frontier and

exogenous innovation through R&D activities. On the other hand Endogenous Growth Theories

(EGT) «engdogenizes» technological change as a function of the economic activities either as

learning externalities or direct expenditure on R&D. EGT allows sustained growth through

human ingenuity. (Naqvi) emphasizes that EGT cannot substitute development economics

because of stringed constraints; and the lack of variables related to structural change and fair

distribution (of the wider phenomenon of economic development).

TRADE AND GROWTH

Furthermore, the paper discusses the relationships between rate of growth, and some of the

misconceptions about them. The role of trade (export expansion EXE) in growth or at least its

superiority over protectionism (Import-substitution industrialization, ISI) seemed to be

confirmed by the success of the High-performing Asian economies (HPAE). However the

analysis does not take into account distribution fairness, not only within the country but also

the deterioration and problems of trade are imposed on the welfare of the developing

countries. Moreover the HPAE have also used efficient ISI, therefore the conclusion is that

both ISI and EXE are needed to boost such development. An intelligent combination of the two

approaches can lead to the best outcome as for the HPAE.

Trade over protectionism under the excuse of higher export rates is not a decisive factor since

[Even though protectionism may seem to lead to lower saving, less utilization of capacity,

unemployment and worse income distribution by increasing internal costs and inefficient

industrialization. ] trade has not be proven as completely superior because of ambiguity and

subjectivity of their indicators. Furthermore, increased exports are strongly correlated to GDP

growth nonetheless causality between these variables is not yet confirmed and is subject of

discussion, e.g. EXE may not lead to LONG-RUN growth but otherwise.

Additionally, world trade agreemments are usuallyunequal in distribution (more for developed

countries –more productive countries) and the externalities generated (commonly over

developing countries) are not compensated. E.g. the access of developing countries products

into developed countries markets is limited and in this case trade certainly in the short and

long-run benefits pioneers rather than late-runners. E.g. 2) reciprocity cannot be conducted by

both parties since developing countries cannot sustained some of the conditions that

reciprocity asks for and hence cannot make the most of the reciprocity offered by developed

countries. E.g. 3) Negotiations are generally in the power of the powerfull, therefore

reciprocity governs rather than free trade. E.g. 4) Some most liberalized countries did not

experience real development.

MARKET AND GOVERNMENT

There are critics about possible socialism, though there have not been any perfect laissez-faire

society… government always participates in certain degree. The fact is that the market would

be perfect, were this world perfect as well. Therefore the government through adequate

intervention can help the market avoid failure. E.g. if the technological change were

exogenous, government intervention would hardly have impact.

Government intervention is attacked because more welfare is lost due to government failure

than with market failure. Even this remain to be proven, the fact is that there are not real tools

to meet the perfect conditions the market requires to avoid failure, hence market failure is

always unavoidable. Therefore the compensation of externalities can only be targeted by the

government. In addition intergenerational concerns are difficult to be accounted for by the

current market. Other counterpoint against market is that even though there is corruption in

government (failure) in the market there is fraud that increases when the benefits are big

enough to overpass the honesty limit. Finally, government should deal with the regulation of

common property and goods and with R&D bottlenecks when most resources are devoted to

this activity rather than to food for example.

ETHICS AND DEVELOPMENT

Development economics deals with ethical objectives named the sharing of gains and fair &

equitable distribution of them. Therefore development analysis can never be reduced to self-

interest of neoclassical economy. Unfortunately development does not work closely together

with ethical issues (detached), i.e. ethical values are generally undermined by market

economies.

In this respect, development economics only supports self-interest in the sense of the invisible

hand. However this neoclassical view is considered as a result of economic rationalism, which

does not consider altruism and does not consider externalities (Pareto inequality).

Redistribution is seen as a violation of individual rights and to fight this conception

development economics need to defend redistribution in as much as possible a positivist way1.

To do so, utilitarism, Rawls theory, Kantian moral can be a tool to avoid circumstance-base

decisions.

“development policy must aim to provide food and other primary goods needed by the

least-privileged in the society; and issues such as the distribution of income and wealth

should be relevant for development economics - even though the “equality of result

implies a distribution process that is the antithesis of the market” (Coleman, 1989, p.

52)2“

CONCLUDING REMARKS

Neoclassicla does not talk about the growth promoting process of structural

transformation.

Precipitated privatization is also costly, market solution is not always the best (it is not

always proven as so)

Government intervention is also useful for market solutions

Market and non-market solutions should be seen as complements rather that

substitutes or opposites.

Apply the concept of R&D spillovers and endogenous growth in development

economics

ISI -» trade but with and efficient and speedy transition “The secret of success, as in

the case of the East Asian countries, is to make a speedy and efficient transition from

one strategy-to another in response to the changing conditions of the world demand,

and to expand the tradeable sector by making it science-based rather than resource-

based”.

Ethical rather than market-clearing oriented solutions

DE is not essentially positivist but normative and prescriptive “all issues which carry a

clear altruistic ethical motivation and which do not admit of a simplistic market-

1 Positivism defend argument with rationalism rather tahn with subjetivity and intuition.

2 I could not get this article

clearing prescription. The argument that the market-given freedom economizes on the

use of scarce ethical resources (Arrow, 1972)3 is true to some extent; but the fact

remains that altruism is not a scarce resource [I love it]; rather, it increases (decreases)

with a more (less) frequent use (Hirschman, 1985, p. 362)4”.

“it should be neither irrational to act morally nor immoral to act rationally” ethical

values reduces the cost of market intervention, market failure and government failure.

“The job of combining efficiency with justice and realism with compassion for the poor,

the needy, and the downtrodden is difficult; but it must be done to change the world

for the better.”

NAQVI, S. N. H. 1996. The significance of development economics. World Development, 24, 975-987.

3 I could not get this article

4 I could not get this article