Tag Archives: development

Beware economists bearing PhDs

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A footnote on Joe Studwell’s [amazon_link id=”1846682428″ target=”_blank” ]How Asia Works[/amazon_link]. He writes:

“At the industrial policy-making level, what stands out with the benefit of hindsight is that there was almost no role played in Japan, Korea or Taiwan by economists. Meiji Japan blazed its trail by following the Prussian, and early American, model which rejected the classical economics that began with Adam Smith and David Ricardo. … There was a strong prejudice against the theoretical approach associated with modern economics and in favour of practical problem-solving.”

Studwell goes on to say that at the height of its 1960s triumphs, MITI had just 2 PhD economists (although I’d note that far fewer economists bothered with PhDs in those days). Taiwan’s equivalent bureaucrats were all engineers. The intellectual tradition on which North East Asian industrial policy was based runs from [amazon_link id=”B00ANKL3YY” target=”_blank” ]Alexander Hamilton[/amazon_link] and [amazon_link id=”1596059524″ target=”_blank” ]Friedrich List[/amazon_link] and includes, in the 1960s, Walt Rostow’s influential [amazon_link id=”0521409284″ target=”_blank” ]The Stages of Economic Growth[/amazon_link].

There were other development economists who focused on the specific and the practical rather than the general and theoretical – in their different ways [amazon_link id=”0415312973″ target=”_blank” ]Peter Bauer[/amazon_link] and [amazon_link id=”0815736517″ target=”_blank” ]Albert Hirschman[/amazon_link] – but they were a minority until recently. It’s interesting to see the intellectual tide turning, with the backlash ranging from the emphasis on randomised control trials to Dani Rodrik’s wholly sensible caution in his 2005 paper Why We Learn nothing from regressing economic growth on policies (download pdf from his home page or here). Here Muryat Iyigun ponders the intellectual tyranny of generalisable results when case studies can be so valuable as evidence.

[amazon_image id=”1846682428″ link=”true” target=”_blank” size=”medium” ]How Asia Works: Success and Failure in the World’s Most Dynamic Region[/amazon_image]

Learning economic lessons from Asia

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I’ve nearly finished reading Joe Studwell’s excellent book, [amazon_link id=”1846682428″ target=”_blank” ]How Asia Works: Success and Failure in the World’s Most Dynamic Region[/amazon_link]. Both Tyler Cowen and Cardiff Garcia praised it in our recent Alphaville podcast conversation about economics books, so I obviously had to catch up.

[amazon_image id=”1846682428″ link=”true” target=”_blank” size=”medium” ]How Asia Works: Success and Failure in the World’s Most Dynamic Region[/amazon_image]

It is indeed worth reading, building on obviously highly detailed knowledge about the countries of East Asia to theorise about the policies that successfully encourage economic development and rising living standards. The book contrasts the development success of the northern economies of East Asia (Japan, South Korea, Taiwan, China) and the southern ones (Thailand, Indonesia, Malaysia, the Philippines). The compare and contrast approach leads Studwell to conclude that successful economic development takes the following path:

1. An initial land reform that breaks up plantation-style estates and redistributes land from  landlords to tenants. Perhaps counter-intuitively, the application of a great deal of family-based labour on small farms has proven a far better footing than greater use of capital equipment at large scale for improving productivity. The evidence is that yields on the small plots of countries that did undertake land reform exceeded yields on large farms. In addition, the increased incomes of largely rural populations are vital for growing the domestic market for manufactures over time. However, land reform is politically difficult – the examples in Asia stemmed from great crisis. The redistribution also needs to be accompanied by a suite of policies to support agriculture, including extension support, rural credit and infrastructure investment.

2. The next stage is to grow domestic manufacturing. Studwell describes this as “protectionism”, whereas I would call what he depicts in the successful economies “industrial policy”. He rehearses the often-made argument that just as European economies and the US relied on tariff barriers to protect their infant industries in the 19th century, so the successful Asian economies built their manufacturing sectors behind protectionist walls in the 20th century. However, what he describes in the country detail is a policy much subtler than the use of trade barriers. Reading the examples, it seemed to me that the key elements were: (i) a willingness to use government funding to support domestic manufacturers until they reached a scale that would make them globally competitive – importantly, testing their competitiveness by making investment or subsidies depend on export volumes; (ii) opening domestic markets to imports of key inputs for exporters even at the expense of other domestic industries – in other words, not protection against imports so much as support including export subsidy for strategic sectors. One example is Japan’s decision to open the market to imported cotton, which did for its own cotton growers.

Now, it is true to say that the free-market philosophy driving economic policy since the 1980s means governments in the UK at least have self-amputated their ability to support manufacturing in this strategic way. Interestingly, Harold Wilson’s famous “White Heat of Technology” speech (link available on the Ballots and Bullets blog), 50 years old this week, reads as exactly the kind of long-term, market-tested intervention Studwell describes. Mariana Mazzucato has recently been beating the drum for a rediscovery of industrial policy with her very interesting book [amazon_link id=”0857282522″ target=”_blank” ]The Entrepreneurial State[/amazon_link]. It seems a no-brainer to me (to use the technical economics jargon). Maybe others hesitate because of the association with protectionism that helps lame-duck industries limp along, the picking of winners which turn out to be losers, but this is not what Studwell describes – and it’s why I think he is wrong to use the term “protection”. Setting aside the issue of the label, we need to (re-)learn this lesson from the Asian success stories.

The book also lacks in this section more analysis of how the policy needs to adapt to the world of extended supply chains of increasingly complex manufactured products. It is much harder for a poor country to find a role in global industries now than it was for Japan to reverse engineer washing machines in the 1960s.

3. The third stage extending the role of financial services, while keeping finance on a short leash. With hindsight, it is clear that the globalisation of the 1990s and 2000s over-liberalised high finance while not bringing necessary ‘low’ finance to billions of people with low incomes and no access to the formal banking and credit sector. Any economist who thought globalisation was a turbulent but broadly good thing (this includes me) surely has to accept that there was too much liberalisation of cross-border portfolio flows, and that emerging economies should keep the ability to control these flows in their policy armoury.

The book ends with a chapter on China that hedges its bets on the country’s prospects, pointing out the obvious institutional and structural challenges ahead. It also left me feeling pretty cautious about the prospects for sustained development in the region’s still-emerging economies such as the Philippines, Indonesia and Thailand – not much political prospect of land reform or reigning in the elites in those countries.

This is definitely one of the best books I’ve read on the region, and on economic development in general. It’s a model of tying together historical knowledge, empirical evidence and analysis. It is also a good complement to Justin Yifu Lin’s [amazon_link id=”0691155895″ target=”_blank” ]The Quest for Prosperity: How Developing Economies Can Take Off[/amazon_link], which sets out a Chinese policy maker’s perspective on the same questions regarding manufacturing.

Learning about development economics

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Dean Yang posted his syllabus (pdf) for the graduate Development Economics course he is teaching at the University of Michigan this Fall. It looks a terrific course. I particularly approved of the selection of books recommended for purchase:

[amazon_link id=”0718193660″ target=”_blank” ]Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty[/amazon_link] (2011) by Abhijit Banerjee and Esther Duflo – an inspiring exposition of the use of experimental methods to determine what interventions are effective in certain contexts. There’s a danger of overdoing the enthusiasm for RCTs because you need to be confident about controlling for context – a bag of lentils as an inducement to get a child vaccinated has different results in, say, Chennai and Liverpool. But this approach represents a huge step forward in development economics.

[amazon_image id=”0718193660″ link=”true” target=”_blank” size=”medium” ]Poor Economics: Barefoot Hedge-fund Managers, DIY Doctors and the Surprising Truth about Life on less than $1 a Day[/amazon_image]

[amazon_link id=”0691148198″ target=”_blank” ]Portfolios of the Poor: How the World’s Poor Live on $2 a Day[/amazon_link] (2009) by Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven. One of my favourite books. It gathers new evidence about the financial services people on very low incomes need – and the answers are sometimes surprising. Should be read by anyone with views on microcredit and/or payday loans.

[amazon_image id=”0691148198″ link=”true” target=”_blank” size=”medium” ]Portfolios of the Poor: How the World’s Poor Live on $2 a Day[/amazon_image]

[amazon_link id=”1846143454″ target=”_blank” ]Scarcity: Why Having Too Little Means So Much[/amazon_link] (2013) by Sendhil Mullainathan and Eldar Shafir. I haven’t read this yet but am keen to do so. Here’s a great review by Cass Sunstein and here it is written up on Marginal Revolution.

[amazon_image id=”1846143454″ link=”true” target=”_blank” size=”medium” ]Scarcity: Why having too little means so much[/amazon_image]

The fact these are recommendations on a graduate course syllabus should not put anyone off – the two I’ve read are clear and definitely accessible to the general reader.

Thinking aslant about development economics

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I’m about half way through the biography of Albert Hirschman ([amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher[/amazon_link]) now, and despite the arm-ache from holding up the book, am enjoying it more than anything I’ve read recently. My interest was particularly caught by an account of a paper Hirschman delivered at a conference at MIT in 1954, “Economics and Investment Planning: Reflections Based on Experience in Colombia” (sadly it seems to be only available as a mimeo, not published anywhere, but if anybody knows differently, please tell me!)

At this time, Hirschman was working for the World Bank and then as an independent consultant based in Bogotá, having been unable to get a job in Washington because of post-war anti-communist paranoia, even though he was anti-communist himself. His biographer Jerry Adelman reports that Hirschman’s paper went down badly with the audience of top academics, as it criticised the academic methodological orthodoxy, and in particular the claim to universality and abstract thinking – albeit applied to competing models of development. This gave rise, he believed, to a (false) presumption of the superiority of the western expert over the locals who understood what was happening in the economy. Hirschman advocated instead using case studies to try to identify which businesses were thriving or not, and a policy emphasis on experimentation and improvisation. He was also unusual in his focus on private investment rather than government planning.

Reading this biography is making me embarrassed to have read so little else by Hirschman over the years. Still, it has set me thinking about development economics. This field seems to me to be in quite good health these days, after decades of suffering as one of the ideological arenas of economics. There have been lots of terrific books published in recent years, including those such as [amazon_link id=”1611747511″ target=”_blank” ]Poor Economics[/amazon_link] riding the wave of field experiments. Still, it is the mavericks of development economics who until recently provided some of the most interesting perspectives. Think of Mancur Olsen’s [amazon_link id=”0300030797″ target=”_blank” ]The Rise and Decline of Nations[/amazon_link], Peter Bauer eg [amazon_link id=”0674200330″ target=”_blank” ]The Development Frontier[/amazon_link], Deepak Lal’s [amazon_link id=”0262621541″ target=”_blank” ]Unintended Consequences[/amazon_link] or even Hernando de Soto’s [amazon_link id=”0552999237″ target=”_blank” ]The Mystery of Capital[/amazon_link], briefly fashionable but academically dissed.

It is as if some economists are not considered by the orthodoxy to write authentically about development, and I wonder if the identification of these writers with right-of-centre political views means the left-of-centre establishment of development economics rejects them? If so, Hirschman seems to have pulled off the combination of the ‘correct’ political identification with a more or less Hayekian methodological approach and – like my other examples – a strongly multidisciplinary flavour. This isn’t my field so I will defer to people who know more, but will be interested in reactions.

As for Hirschman, Adelman writes: “He was not prepared to abandon his views in favor of more acceptable theories.”

[amazon_image id=”0552999237″ link=”true” target=”_blank” size=”medium” ]The Mystery Of Capital[/amazon_image]

Update: Francisco Mejia has pointed out another review of the biography making a similar point:

http://blogs.iadb.org/desarrolloefectivo_en/2013/06/14/hirschman-or-the-years-of-thinking-differently/

Banking the World

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A Guest Review of [amazon_link id=”026201842X” target=”_blank” ]Banking the World: Empirical Foundations of Financial Inclusion[/amazon_link]

By Dave Birch, Consult Hyperion

Singapore has 600 bank branches per 1000 km² of land area whereas Ethiopia has less than one. So does Singapore have lots of banks because it is rich, or is it rich because it has lots of banks? You would think that the former clause explains everything, but it doesn’t and this book deals with that latter clause. Why? Because the availability of private credit leads to economic growth and with no access to private credit and the other financial tools necessary for entrepreneurship, the poor will remain so. To a technologist like me, there is no doubt about what to do. Having a mobile phone increases the chances of being banked, across-the-board, by around 12%. Therein lies optimism. So I know how to connect the excluded. But connect them to what?

Well, there are quite a few ideas in this terrifically interesting and useful collection of chapters – [amazon_link id=”026201842X” target=”_blank” ]Banking the World[/amazon_link], eds Cull, Demirgüç-kunt, Morduch –  written by a variety of experts that will be of interest to anyone working in the field. Do not make the mistake of imagining that this is only for those working in the developing world: I think there are a great many lessons we can draw from the examples here to help us deal with the difficult problem of excluded groups in the developed world right now.

[amazon_image id=”026201842X” link=”true” target=”_blank” size=”medium” ]Banking the World: Empirical Foundations of Financial Inclusion[/amazon_image]

If I were to be pedantic, I might spoilt the neat title by arguing that access to formal financial services is not the same things as being “banked”, which may be why I found the chapter on the role of social capital particularly interesting. I am very curious about the relationship between formal, informal and social institutions as providers of financial services into otherwise excluded groups because the new technology allows a great many possibilities beyond the “standard” bank account. The detailed statistical examination in this chapter distinguishes between the social capital of individuals and the generalised trust in a society and shows how the ability to build up social capital delivers access to both informal and semiformal capital. By contrast, access to formal capital depends more on generalised trust.

In fact the book contains a great many very detailed data tables and statistical analyses (e.g., on mortgage finances in Central and Eastern Europe) as well as high level commentary and these are a great strength. Having the data is vital. To take one example: Detailed longitudinal studies from sub-Saharan Africa dispel a number of myths about the link between financial and social inclusion as well as showing that access to financial services measurably increases income. One myth that I was surprised to see dispelled in this study was that there is a correlation with gender. This turns out not to be the case. We need to reach both men and women.

I have to say that the book made me even more convinced that electronic transaction networks, whether through mobile phones or agent networks or whatever, have a direct impact on the lives of the least well-off. I read, to give one example, that fertiliser use depends on the farmer having savings at the right time. Therefore the financial tools to overcome this problem contribute directly to alleviating hunger. This isn’t theoretical or esoteric work, it’s practical and vital work.

My favourite quote from the book was that “remittances may promote idleness on the part of recipients”. As the father of teenage son, I can attest to this, a phenomenon I have observed in my own home. Now that I have sound empirical foundations for doing so, I will be instituting my own economic revolution, starting this weekend.