Wednesday, August 26, 2009

Patterns of Development

A friend suggested that I write up for publication my point about silver flows and the similarity between C16th and C17th Iberian politics with contemporary Arab politics. Asking economic historian Eric Jones for advice, he recommended I look up the resource curse literature. So I purchased a (second hand) copy of Richard M. Auty’s Patterns of Development: Resources, Policy and Economic Growth, a ten-year old text on development economics. (It does suffer a little from being written before the 1997 Asian crisis.)

It proved to be readable and informative survey of what has been learned from 60 years or so experience with developing nations. Precisely because all parts of the globe are dealt with, one gets a much more coherent view of what does, and does not, work, rather than the cherry-picking of congenial cases which, alas, often passes for analysis.
My original interest was in the effect of massive resource flows on the political institutions of countries. Auty is more concerned with issues of economic development, but there is useful overlap.

Auty’s thesis is that we now have a fairly good idea of what does not, and what does, work for development policy. He essentially agrees with the list compiled by K. Griffin in a 1989 book:
Investment in human capital (i.e. education)
Early redistribution of key productive assets (notably land)
Pursuit of an employment-intensive development policy
Sustained rapid growth of aggregate per capita income
Encouragement of local participation in the choice and implementation of social and economic projects.
What is notable about this list is they are “general” policies—i.e. they provide general benefits and services. What comes across very strongly, is that discretionary interventions (particularly discretionary control over market entry) have a consistently poor record (which is true locally as well). They are highly prone to capture by discrete interests and to deform policy into rent-seeking. This is particularly so for autarkic policies (using state power to foster local import-substitution industries). Often, they become devices for urban-based interest groups to rip off the rural majority. The only cases that suggest “infant industry” approaches have much value, are cases where such assistance was limited in time and specifically aimed at creating products for export.

A caveat about land reform that Auty does not bring out but is fairly clear from his discussion is that it works far better if done in ways that encourages confidence in the resilience of property rights. If it is just a “revocable game”, its effects are likely to be much less beneficial than when it is done in ways which reinforce, rather than undermine, property rights.

Auty presents evidence that circumstances are not destiny—that good or bad policy choices can profoundly affect results. Nevertheless, it is clear that strong natural resource endowments tend to encourage poor policy because they present apparently “easy” choices.

Something else that comes across is that, while there are plenty of instances of poor advice from economists (often due to being over simplistic), the track record of other social science disciplines is notably worse. Economists are at least not prone to the mad idea that the central concern for public policy is to frustrate, control or stop capitalist acts between consenting adults. On the contrary, that is, in general, precisely what is to be encouraged for economic development—the contrast between the productivity of China’s peasants after Deng’s reforms gave them effective property rights as compared to the declining productivity under collective ownership is a particularly striking example. Indeed, Auty brings out how declining productivity is the normal pattern of public ownership. The demonstrable, and general, dangers of policy capture is very much a concern that runs through Auty’s analysis.

As for “progressive” analyses, the general pattern is they are often quite good at identifying key issues, patchy on the diagnosis of the causes and generally very poor at solutions. Not least because they tend to be very selective about the policy capture issue—they are generally quite keen on policy capture, as long as it is policy capture for folk like them (or folk they can project as being like them) pushing ideas like their’s. The notions that good public policy is a discovery process and that a fool can put on his own trousers better than a wise man can do for him not being normal parts of the mindset. Hence the obsession with controlling, frustrating or stopping capitalist acts between consenting adults. Or, to put it another way, the possessors of intellectual capital are very prone to recommending approaches which increase the status/prospects of possession of intellectual capital.

I liked Auty's discussion of the development over time of various lines of argument and analysis. I was particularly taken, for example, with the discussion of the Baldwin thesis about tropical versus temperate agriculture (pp 216ff). R. E. Baldwin argued (in 1956, examining the American South versus Midwest) that tropical (i.e. plantation) agriculture involved high initial capital investment (so had higher barriers to market entry), used unskilled labour and had limited ability to substitute capital for labour. The combination of a "rigid" production function, narrow export focus and very unequal social structure undermined economic dynamism.

Examining the global application of the Baldwin thesis, W. A. Lewis (in 1978) noted that there were two streams of labour migration prior to 1914. The first was white and increasingly expensive flowing from Europe to temperate lands. The second was coloured and cheap and flowed in tropical countries. White workers applied considerable political pressure to keep the two streams separate to protect their (rising) wages (the effect of subsituting capital for labour, since it makes labour relatively more scarce). In the tropics, cheap labour undermined the incentive to substitute capital for labour, so failure to substitute capital for labour was a price effect, not an inherent quality of tropical agriculture. Low wages meant limited local purchasing power, which discouraged local investment in manufacturing. Lewis noted that the high initial capital investment typical of tropical crops discouraged switching staple crops, increasing the tendency to be stuck with a product of declining value. Temperate crops, on the other hand, typically involved much less capital investment so could be changed in response to price changes much more easily. A good example of iterative progress in scholarly understanding.

There are, of course, always quibbles. I thought using government expenditure ratio to GDP as a measure of intervention (p.214) was fairly poor, since the level of expenditure says almost nothing about, for example, transaction costs or about barriers to market entry.

Auty concludes with a sensible discussion of the importance of environmental issues, and different approaches thereto. An informative book.

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