Performing (economic) miracles

The metaphor ‘economic miracles’ as applied to the few once-poor countries that have achieved a trajectory of catch-up growth is revealing: these growth dynamics are spectacular, but happen very rarely. In their terrific new book, Beating the Odds: Jump-Starting Developing Countries, Justin Yifu Lin and Célestin Monga give the best overview account I’ve read of how countries might begin to achieve the lift-off from poverty trajectory, and an outline of how in practical terms governments might go about it. And although directed at poor countries, their analysis is more general.

The book points out that mainstream thinking is both impractical and factually wrong. Impractical because, given the emphasis on institutions now, the advice is often: “Be more like Denmark.” Sure, that would be marvellous. Incorrect, because the examples we have of countries reaching escape velocity for the most part did not have the fine, transparent and effective institutions or high-quality infrastructure now usually recommended as preconditions.

One of the platitudes they attack is that corruption or at least bad governance is the main barrier holding back poor countries. Rich countries have corruption scandals too, they point out. Are these less severe than in poor countries? They ask whether the role of money in US elections or corporate lobbying in the west is really ‘less corrupt’. Is the expected 20% tip everywhere in the US different from the expectation in say India that one will make payments to all kinds of people – in both cases, people not earning very much can’t afford not to expect the tip.

So if not western-style institutions or education or infrastructure, what does lead to growth? The book answers: “Sustained growth takes place because of continuous technological upgrading, institutional innovation and structural change.” At the heart of the process is an evolving set of factor endowments. Poor countries must start from the reality of labour intensive resources, and must focus on using what they have; it’s all about (latent) comparative advantage. The factor endowments will change over time, and hence the need for changing institutions and adopting additional technologies. All countries are different: there is no standard, abstract model. High-profile failed ‘big push’ efforts typically ignored the reality of factor endowments – this includes examples such as Zaire’s (DRC) attempt to start up an auto industry in the 1970s, or Indonesia’s bid to enter the shipbuilding market, when neither had the capital or the skills to produce these goods, nor high enough incomes for a domestic market to grow.  Successful ‘miracles’ start with what they have, continuously diversify, and identify and encourage agglomeration economies.

The authors are firm advocates of strategic industrial policies, in the sense of continual upgrading of hard and soft (legal, financial, educational) infrastructures to suit the changing needs of the private sector, the goods and services it produces and the markets it serves. “Clearly, individual firms cannot internalise all these changes cost effectively, and spontaneous co-ordination among firms to meet these new challenges is often impossible. … For this reason, it falls to the government either to introduce such changes or to co-ordinate them proactively. This essential piece of the growth and development puzzle has been missing in the standard model and the traditional development policy framework.” The government also needs to provide information (about say technologies, management techniques and markets) and provide initial human capital (training): “The social value to the economy as a whole of the first movers’ investments is usually much larger than their value to specific firms.” Finally, governments may need to attract FDI or incubate new activities, “to overcome deficits in social capital and other intangible constraints.”

These roles for active government policy are surely valid – and as much for the UK as for a low income economy. The authors are deeply sceptical about the value of (much) foreign aid and especially the multiple conditionalities attached.

In short, “Modern economic growth is a process of continuous structural changes in industry and technology and in political and socioeconomic institutions.” This is as true now as it has been everywhere since the late 18th century. As the book points out, this is not a radical new idea – it quotes Simon Kuznets saying so in 1966, and indeed economists from Marx and Schumpeter to Robert Solow and Joseph Stiglitz have made essentially the same point. Somehow, though, by the time the official aid organisations get involved, the policy advice has been bowdlerised into a standard set of impossible conditions, not recognising how counter-productive these can be in a second-best world.

Elsewhere, the authors have developed a more practical toolkit (the GIFF, growth identification and facilitation framework) for governments to identify their economies’ specific endowments and niches. The downside of recognising the importance of context is that one cannot sum up an economic development programme in ten universal bullet points. In general terms, the book supports export zones and infrastructure investment, and mitigating rent-seeking through exposure to the sunlight of foreign competition as well as political leadership.

The book ends with The Conference of the Birds: thousands of birds embark on a long and perilous journey but only 30 make it the whole way. When they reach their destination, they find the mythical king they were looking for is a reflection of themselves. Achieving successful development cannot start with a list of mythical missing ingredients as preconditions. Development economists and donors have been wrong to insist on an ideal model, Lin and Monga argue – and they are no keener on the latest development economics fashion for experiments and RCTs, as these ask micro questions and get micro answers; they cannot address the need for structural transformation. The bottom line is pragmatism, and the willingness to embark on the long and perilous journey, like the brave handful of birds in the 12th century Persian story.


Wanting to change

Anybody who reads Duncan Green’s excellent blog, From Poverty to Power, won’t be entirely surprised by the approach he takes in his equally excellent new book, How Change Happens. It is based on two pillars. One is Amartya Sen’s capabilities approach to human development (‘the freedoms to do and to be’), and I’ve always thought that when you appreciate its ethical and practical merits, it’s hard to take any other approach. The other is the need for systems thinking when it comes to considering economic policies or other interventions – in any context, really, but certainly in the case of development.

“Change in complex systems occurs in slow steady processes such as demographic shifts, and in sudden, unforseeable jumps,” Green writes. Mostly, change is extremely, painfully slow. It turns out to be impossible to do one thing because another, linked thing gets in the way. Events and crises open the way for the big shifts – being an economist, I think of this in terms of what it takes to move a co-operative game to a new focal point. But even then, the direction of the jump is contingent, messy, unpredictable. It anyway depends on the prevailing climate of ideas and norms – so part of the challenge is to be ready to take advantage of a crisis by having done all the contextual spade work, all the while getting on with the day job of trying to bring about incremental changes in the previous state of affairs.

Needless to say, this does not make for a concise ten-point plan in the final chapter (although it does try to sum up the whole in a ‘power and systems approach’ in the final few pages). The book has some interesting practical ideas, however. I like the principle of looking for ‘positive deviance’ – look for examples of people or activities that succeed against enormous odds, for outliers, and use them as ‘social proof’ so others copy whatever it is. This is exactly the way new technological innovations spread: the ideas are there, a few people try, and others imitate them. There are loads of examples of advocacy and development organisations and initiatives that have been able to implement responsive, adaptable changes (many of these brought Tim Harford’s Adapt to mind). Other suggestions are harder to see how to implement. The book argues that principled leadership matters. I agree. But where is it? How do donors encourage it?

Green concludes that many organisations in the aid world, including his own, need to move away from linear thinking and get wiser to context and the whole complex environment (actual and political) in which they operate. I hope they follow his advice and this book is certainly well worth anyone working in this world reading. The one element missing, though, seems to be the meta-analysis of the development agency ecosystem itself, and the prevailing ideas. For example, how do you get social innovation akin to technological innovation in a world of impact assessment and RCTs? Or indeed combine fleetness of foot with a genuine need to understand ‘what works’? Understanding one’s own cognitive biases or limitations is a tall order. What’s more, the aid world has incentive structures built in that will discourage change. In a variation on the old lightbulb joke (How many psyhologists does it take to change a lightbulb? Only one, but the lightbulb has to really want to change), how change happens is that a lot of people have to want change to happen.

Anyway, there’s no excuse for not reading the book, as it’s also published as an open access pdf. I hope lots of activists read and digest and change their approach, but suspect it will prove difficult for many.



The Great Escape

I’m very late to reading Angus Deaton’s excellent . There is lots to like about this book. It’s a clear and comprehensive summary of the state of knowledge about the history and present of two key dimensions of human well-being on earth. Even for economists who’re pretty familiar with the data and research, there are insights from the way Deaton sets out the evidence here. There were plenty of trends in the statistics I hadn’t known about before reading the book – one example is the recent increase in dangerous and deadly behaviour by young people (especially men) aged 15-34 in recent years compared with 70 years ago. (I suppose life presented enough external dangers then.)

[amazon_image id=”0691165629″ link=”true” target=”_blank” size=”medium” ]The Great Escape: Health, Wealth, and the Origins of Inequality[/amazon_image]

I particularly liked the care he lavishes on the statistics – the sources of data, the conceptual problems, the uncertainties – all done in a way the general reader can understand (although it does make for some quite dense sections). As Deaton notes, the way statistics are defined and collected determine how policy problems are defined and addressed: they “are part of the apparatus that allows what political scientist James Scott memorably called ‘‘.

The book is also strong on the social and political context for the spread of ideas that improve health and wealth. As Deaton writes, “Diffusion of ideas and their practical implementation take time because they often require people to change the way they live.” In particular collective actions – affecting public health or education – are inherently political.

And then the new facts: did you know Louis Pasteur invented Marmite (and then licensed it to a British brewer?) Fabulous addition to the shiny nuggets of knowledge.

UPDATE: On the Marmite issue – Deaton’s Pasteur claim was challenged on Twitter:

@diane1859 Louis Pasteur invented Marmite? Wikipedia says it was some other guy:
06/04/2016 10:15

@diane1859 I’ve looked into this a bit more and I think I’m on Team Von Liebig.
06/04/2016 10:48

The hamburgerized economy

It’s Saturday, when I try to bring order to my life, and I was just sorting out the teetering pile of books when I unearthed by Louise fresco. It’s a notably handsome book with lovely pictures, so already enticing. Paging through, it looks a fascinating read as well. Although billed as a cultural history, it looks at the dominant role of supermarkets in the way we shop, at genetic modification, at agriculture, poverty and economic development, at the slow food movement and the globalization of food supply.

[amazon_image id=”0691163871″ link=”true” target=”_blank” size=”medium” ]Hamburgers in Paradise: The Stories behind the Food We Eat[/amazon_image]

Now, I love food and prepare most of our meals from scratch, buying few ready-made items. Quality is important to me. Eating as a family, round a table, talking, is essential. Yet the slow food movement makes me uneasy, as it often seems to reject the productivity needed to feed everyone, and to embody an approach few can afford. Agricultural productivity needs to increase again. As it happens, I just spotted this tweet on exactly this subject:

Global middle class is booming, so is demand for food. More crop per acre is the only way!
21/11/2015 14:18

On the other hand, the scandals of industrial food production – horse meat disguised as beef, the treatment of animals including stuffing them with antibiotics, obesity, the high-salt, high-fat, high-margin products etc – are unacceptable and probably unsustainable. We will soon be publishing a terrific book by David Fell on food policy and taxation in our Perspectives series. meanwhile, I’m going to read over the Christmas holiday. Fresco concludes: “Without food there is no evolution and no civilization. We are what we eat, literally. … What it means to be human is concentrated in food and our understanding of it. Inevitably, part of that is the consciousness that many have too little to eat, or cannot choose to have the things tah are associated with a decent meal.”


Happy fish and economic growth

From by Arthur Lewis (after whom my department building is named):

“[T]he advantage of economic growth is not that wealth increases happiness, but that it increases the range of human choice … We do not know what the purpose of life it, but if it were happiness then evolution might just as well have stopped a long time ago, since there is no reason to believe that men are happier than pigs or fishes. What distinguishes men from pigs is that men have greater control over their environment; not that they are more happy. And on this test, economic growth is greatly to be desired. The case for economic growth is that it gives man greater control over his environment and thereby increases his freedom.”

[amazon_image id=”0415407087″ link=”true” target=”_blank” size=”medium” ]Theory of Economic Growth[/amazon_image]

Shades of Sen’s . Lewis is quoted in H.W.Arndt’s .

[amazon_image id=”0192893300″ link=”true” target=”_blank” size=”medium” ]Development as Freedom[/amazon_image]