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Development is possible, but …
Saturday, 08 August 2009 08:20

Development is possible, but not inevitable, wrote Joseph Stiglitz.  The development success stories did not necessarily follow the development policy recipe book.  Openness to international trade and investment can provide a powerful boost to development.  But it can expose developing countries to the vicissitudes of global markets – as we have seen only too well in the current financial crisis.  East Asis’s emerging economies have seen a dramatic drop in their exports, and also a retreat of foreign capital.


Joe Stiglitz is a quixotic figure, perhaps the most brilliant economist of his generation.  But he is invariably at war with the establishment through his provocative speeches and writings – to such a point that it reduces the impact of this man who predicted the global financial crisis, and sees clearly through the “vested interest-based democracy” of Washington.


But according to a recent Newsweek article, 'Stiglitz's empathy for the little guy—and economically backward nations—comes to him naturally. The son of a schoolteacher and an insurance salesman, he grew up in one of America's grittiest industrial cities—Gary, Ind.—and was shaped by the social inequalities and labor strife he observed there. … "I was struck by the incongruity between the models that I was taught and the world that I had seen growing up," Stiglitz said in his Nobel Prize lecture in 2001.'


This article summarises the main points of Stiglitz’s writings on the New Development Economics.  While they mostly date from his time at the World Bank in the late 1990s, they are just as pertinent today as then.


So yes, the experience of the past 50 years has demonstrated that development is possible.  A handful of countries, mainly in East Asia, have achieved rapid economic growth in GDP, narrowing the gap between themselves and the more advanced countries.  This has lifted millions of people out of poverty.  But development is not inevitable – many other countries, especially in Africa, have seen a growing gap between them and advanced countries.


There is of course more to development than GDP.  Indeed, there are bad examples where governments or elites monopolize wealth or use that wealth for repression or military aggression.  But the evidence shows that economic growth benefits most of the people, most of the time.  Higher GDP is a means to improved living standards and a better society, with less poverty, better health, education and literacy, and higher life expectancy.  By and large, increases in GDP per capita are accompanied by reductions in poverty, even if the gap has been widening between rich and poor in many countries, like China.  More generally, increases in GDP can expand choices, and provides the means to achieve society’s goals.  It is also true that certain countries and provinces (like Sri Lanka, Costa Rica, and Kerala) that have pursued pro-poor social policies have managed to achieve social indicators that are far better than the norm for those at their per capita income.


But more fundamentally, what is development?


According to Stiglitz, “development represents a transformation of society” – a movement from traditional ways to more “modern” ways.  He argues that a characteristic of traditional societies is the acceptance of the world as it is.  In contrast, a modern perspective recognizes change, it recognizes that we, as individuals and societies, can take actions that, for instance, reduce infant mortality, increase lifespans and increase productivity.  Keys to these changes is the movement to “scientific” ways of thinking, even if there will be clashes between science and traditional beliefs.


For Stiglitz, change is not an end in itself.  The changes that are associated with development provide individuals and societies more control over their own destiny.  It reduces the affliction brought on by disease and poverty, not only increasing lifespans, but improving the quality of life.


Such change is not without its costs.  Societal transformation can destroy social and organizational capital, that is, the institutions and relations that set values or encourage value formation, mediate transactions and resolves disputes.  Traditional societies often have a high level of organizational and social capital, even though this capital (like traditional authority relationships) may hinder change.  But the process of destruction may occur before new organizational and social capital is created, leaving the society bereft of the necessary institutional structure with which to function well.


An important aspect of change is the movement of populations to cities, that is, urbanization.  The institutions, social capital and politics that served a stable, dispersed rural population do not transfer intact to cities.  To successfully meet the challenges of industrialization and of population movements into dense urban areas, new institutions and legal structures are required.  Rural social and market relations, which provide insurance against risks through either patron-client relations or single-stranded market-based interaction, need to be replaced by urban safety nets, formal and informal.


Social and organizational capital cannot be handed over to a country from the outside.  It must be developed from within, even if knowledge from outside about key ingredients can facilitate the creation of this social and organizational capital.  The pace of change and the pattern of reforms must be adapted to each country’s ability to create social/organizational capital.  Maintaining social organization and social capital are part of the key to successful development transformations.  This factor may, in fact, be the most important constraint on the speed of transformation.  But development should focus on the preservation of cultural values, partly because these values serve as a cohesive force at a time when many other such forces are weakening.


Is there a set of secret policies for successful development?  In fact, the past couple of decades have seen great advances in development thinking thanks to a few major defining factors, namely: the end of the Cold War; recognition of the limitations of the Washington consensus; and the East Asian miracle which was based on promoting exports, regulated financial markets, and an emphasis on education and technology.


There is no one secret recipe for developmental success -- one size does not fit all.  But experience shows that a combination of open markets, sound institutions and good governance are important.  And as economists have always believed, incentives matter.


The key elements for successful development policies are:


.               Sound and clean economic policies and the rule of law are essential for attracting both domestic and foreign investment.  For example, almost 40 per cent of Africa’s wealth is held overseas.  At the same time, most foreign direct investment going to developing countries goes to just a dozen of developing countries, mostly in East Asia.

.               Open competition is important to ensure that resources are invested in the efficient sectors, and to prevent the inefficiencies and abuses of monopoly powers.  Open markets facilitate economies of scale.    Although the market is not perfect in processing all the informational requirements for efficiency, it is superior to state central planning.  Openness is also important for acquiring knowledge and adapting it for the local economy.  East Asia has been more open than Latin America, South Asia or Africa.

.               Public sector should focus on those areas where it is needed – legal and judicial system, macroeconomic policy, public goods (like health, education, infrastructure and telecommunications), social safety nets, competition policy, protection of the environment (not good in East Asia).  It is crucial to have a competent, relatively honest and well-motivated state bureaucracy that can work with private and nongovernmental entities.

.               Appropriate regulation of financial sectors to ensure fair competition, protect consumers, provide for the safety and soundness of financial institutions, and ensure that underserved groups have access to finance.

.               In East Asia, industrial co-operation between business and government did help promote development, eg, Japan, Korea, Singapore, etc.  But this development model does not work forever.  It can lead to corruption.  Close links between big business and the banking system mean that it is more difficult for SMEs to obtain finance.  This model of close co-operation between business and government failed in other regions like Latin America, South Asia and sub-Saharan Africa.  In contrast to East Asia, these countries were not following their comparative advantage.  How policies are implemented is critical.


Overall, state and markets should be complements.


Stiglitz recommends that developing countries elaborate “development strategies”.  These strategies must be tailored to the situation of each country, and the evolution of the global economy.  Such strategies are not economic plans, but a vision of the transformation of society.  They need to be developed through a participative process, and be owned by the society.  Indeed, the act of constructing a development strategy may help build societal consensus about vision for country and how to get there.  Consensus is necessary for political and social stability.  Meaningful democratic processes, involving participation and voice, combined with policies that promote equity can enhance consensus building and a sense of inclusion, and even the creation of the social capital that is increasingly being recognized as a key ingredient to long term success.


The strategy should serve as a catalyst.  It should identify the country’s comparative advantages; publicizing these is a public good.  Effective change cannot be imposed from the outside, this can promote resistance.  Key ingredients are ownership and participation of civil society.  The strategy must address all parts of society—private sector, public sector, the community, the family and the individual.  Bilateral and multilateral donors should transfer capital and knowledge in the framework of the strategy.  Underdevelopment mainly reflects a “knowledge gap”.


An essential part of development strategies must be to take advantage of the global economy.  Strategies must also be set in regional context.  Openness is not just about comparative advantage; knowledge and technology transfer are more important.  Learning offered by trade takes place in export markets, as developing country firms build relations with sophisticated customers and compete head-to-head with the best producers in the world.  Success in export markets requires learning, and the export champions can bring these lessons back home to apply to the domestic market.  And export revenues finance increased access to more technologically sophisticated imports.  Foreign direct investment brings management expertise, technical human capital, product and process technologies and overseas marketing channels.  Short term capital does not bring these benefits and can be volatile.


While openness brings many benefits, it exposes a country to the inevitable shocks from dependence on foreign markets and foreign capital.  The exposure to the cultures, standards, and norms of foreign countries may also be seen as a threat to indigenous religions, teachings, or ideologies.  It takes strong government actions, and powerful economic institutions, and a plentiful supply of social capital to weather these challenges – and even then there may be large costs to the economy and its traditional values.  For many less developed countries, the impact may be disastrous.


It is also important to ensure that trade and FDI are not just enclaves, as often occurs in natural resource developments and export processing zones.  The goal of development is a transformed economy and society, not a dual economy and society.


All things considered, while development is possible, it sounds like a tall order.  But in even the most successful cases, development takes time, and development is an evolutionary process.


One issue that Stiglitz does not highlight is leadership.  As another Nobel prize winner, Michael Spence and his team found in the “Growth Report”, leadership is certainly a key element in those countries that have succeeded in achieving sustained economic growth.  The elaboration of national development strategies requires excellent leadership from the political and societal elite, and not every country has such leadership.  For example, Japan’s post-war development was pushed by the Americans, but also benefited from excellent leadership from Prime Minister Yoshida.  Regrettably today, Japan, the world’s second biggest economy, has no development strategy, no effective leadership and, some would say, no future!






“The Most Misunderstood Man in America”, by Michael Hirsh.  Newseek, 18 July 2009. http://www.newsweek.com/id/207390


Joseph Stiglitz’s papers on the New Development Economics -- http://www2.gsb.columbia.edu/faculty/jstiglitz/development.cfm


International development: is it possible?, by Joseph E.Stiglitz & Lyn Squire

Foreign Policy, Spring 1998.  www.foreignpolicy.com


Towards a New Paradigm for Development: Strategies, Policies and Processes, by Joseph E.Stiglitz

The 1998 Prebisch Lecture at UNCTAD, Geneva, October 1998


Development Thinking at the Millennium by Joseph Stiglitz


Development Issues: Settled and Open, by Shahid Yusuf and Joseph E. Stiglitz.  Chapter in “Frontiers of Development Economics: The Future in Perspective”, Gerald M. Meier and Joseph E. Stiglitz, eds., Oxford University Press, 2000.


Participation and Development: Perspectives from the Comprehensive Development Paradigm, by Joseph Stiglitz.  Review of Development Economics, 6(20, 163-182, 2002.


The Growth Report




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