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An Agenda for the New Development Economics (Draft)
The seeming disappearance of development economics as a separate discipline some quarter century ago could not have come at a more inopportune time. Some of the criticisms made by mainstream economists of development economics as it was often practiced at the time are valid: for instance, it underestimated the role of markets and rationality. But their argument that developing countries are just like more developed countries, only lacking as much physical (and later, it was emphasized, human) capital and their assumption that competitive equilibrium theorem can be applied in a straightforward way is, if anything, even more misguided. In the last two decades, there has been a growing awareness of the limitations of the competitive paradigm, with its assumptions of perfect information, perfect competition, and complete markets, and with the correlate propositions that distribution and institutions do not matter. Much of the theoretical and empirical work in developed countries has focused, for instance, on agency theory (how information imperfections affect firm behavior and labor markets), the new industrial organization (how imperfections of competition affect corporate behavior), finance (viewed as centering on the information problems associated with allocating capital and monitoring its usage), and R & D. Yet, in this same period, the reigning paradigm in development economics was the Washington consensus, which ignored these considerations, despite the fact that they are even more important to developing countries.
Empirical work looking at a variety of characteristics of developing countries (including not just growth rates, but volatility of growth, wage and price flexibility, etc) shows that they are markedly different from the more advanced countries and from each other. A new development agenda thus must center around (i) identifying and explaining key characteristics of developing countries, and especially those that differentiate them from the more developed countries, and exploring the macro-economic implications, e.g. for growth and stability; (ii) describing the process of change, how institutions, including social and political institutions, and economic structures are altered in the process of development. This includes analyzing reform processes: how can those wishing to effect certain changes bring those changes about, and what are the impediments in doing so. It must do so in light of changes in the global economy (not just changes in the movements of trade in goods and services and flows of capital and labor), and then importance of services, including information and communication (the new economy) and the decreasing importance of heavy manufacturing; and changes in thinking about economics and development more broadly (including those cited above). In assessing development programs we need to look not only at impacts on GDP, but also on the environment, poverty, and democracy. We need to look not only at their short run impact but at their sustainability. Today we recognize that social and political contexts are intertwined with more conventional economic analysis: For instance, there are social control mechanisms that prevent the “tragedy of the commons” in many developing countries, and these mechanisms can be eroded by the process of industrialization, with adverse effects on living standards. The failure to pay due attention to these variables in Indonesia led to policies that created social and political turmoil, with long run adverse effects on Indonesia’s economy.
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