Tag: Development Economics

Recursively. That’s The Only Change I’d Make.

The ability to exercise good judgment is the binding constraint in development is the title of Gulzar Natarajan’s blogpost on Oliver Kim’s essay, which we’ve covered earlier here.

Almost all of doing development is about making non-technical decisions (the technical ones are easier, have limited degrees of freedom, and mostly slot themselves into place). Such decisions are invariably an exercise of judgment by taking into consideration several factors, one of which is the technical aspect (or expert opinion). The most important requirement for the exercise of good judgment is experience or practical knowledge. In the language of quantitative science, it’s about having a rich repository of data points that one can draw on to process a decision.

Source: https://urbanomics.substack.com/p/ability-to-exercise-good-judgment

This applies, Gulzar Natarajan says later on in the essay, to “industrial policy and promotion of industrial growth, macroeconomic policy and inflation targeting, and programs to improve student learning outcomes or skills, increase nutrition levels and health care outcomes, improve agricultural productivity, and so on”.

Let’s take one of these and think about it in slightly greater detail: health care outcomes. Let’s do this in the context of India. Answer these questions, for yourself:

  1. What is the best possible health care outcome you would wish for, in India’s context? Define it however you like – everybody should have excellent healthcare so long as they can pay for it is one option. Everybody should have excellent healthcare regardless of whether or not they can pay for it is another option. Everybody should have free healthcare until we reach a per capita income of x dollars (adjusted for inflation and purchasing power parity, if you prefer) is a third option. You can whistle up a million more, and feel free to let your imagination run wild. You get to define the best possible health care outcome for India – setting the standard is up to you.
  2. Microeconomists will call this the indifference curve, and ask you about the budget line. Mathematicians will call this the objective function, and ask you about the constraints. Humans will say “Haan woh sab to theek hai, magar bhaiya, kaise?”. This is the part where we encounter the bad news – what are you willing to give up in order to achieve your best possible outcome? Best possible health care outcome subject to we spending not more than 20% of our GDP on health might be a constraint you choose to apply, for example. Other people may start to froth at the mouth at the thought we spending 20% of our GDP on health, but you do you (for now). Reduce spending on defense, and pensions, and highways, and on education, you get to say (for now). In my little ivory tower, you get to say, I want India to focus on healthcare outcomes, and healthcare outcomes alone – and I’m ok spending x rupees on it. We get to not spend those x rupees elsewhere, of course – remember, opportunity costs are everywhere, including in imaginary ivory towers.
  3. Here’s another way to think about the same problem. You could also say, I’m optimizing not for healthcare outcomes in the short run, but for free markets. I’m not doing this because of my love for free markets per se, but because of my conviction that this path, and this path alone is the only way to deliver the best possible healthcare outcomes eventually. Sure there will be mistakes along the way, and sure some healthcare services will be denied to people who need it the most for now. But eventually, the market will correct all of these errors, and that in ways we simply cannot know right now. Why can we not know them right now? Well, because we are not omniscient. We don’t know what errors will crop up, and we don’t know what solutions will work best for whatever errors will crop up. If we did know this, we could have avoided those problems in the first place, no?
  4. There are, in other words, unseen consequences to Bastiatian solutions as well. That’s just a fancy way of saying there are opportunity costs everywhere, but let me make the point more explicitly: the opportunity cost of an immediate application of a completely free market solution to healthcare is poor health outcomes for at least some folks today. I might be wrong about this, so please, don’t hesitate to tell me the how and why of it.
    For example, let’s say that government stops spending even a single rupee on healthcare (no CGHS, no PMJAY, no ESIC, no Jan Aushadhi, no government run hospitals, no PHC’s, no government run vaccination programmes, nothing) at 12 pm today. Will health markets be Utopian at 12.01 pm, or will they transition to Utopia eventually? How long is eventually? What problematic outcomes will occur along the way, and do we correct for them? How?
    For example, we may learn that poor families in rural Jharkhand now do not have access to healthcare because all government intervention has stopped. Do we do something about this? If yes, what? If not, why?
  5. This cuts both ways, of course.
    For example, let’s say that government doubles its current expenditures on healthcare, at 12 pm. Will health markets be Utopian at 12.01 pm, or will they transition to Utopia eventually? How long is eventually? What problematic outcomes will occur along the way, and do we correct for them? How?
    For example, we learn that corrupt practices when it comes to invoicing in procurement departments have gone up because government expenditure has gone up. Do we do something about this? If yes, why? If not, why?
  6. Given your ideological bent of mind (and we all have one, learn to live with it), you have an urge to say “Ah hah, exactly!” and “Oh, c’mon!” to pts 4 and 5 – in that order. Or to pts 5 and 4 – in that order – it depends on what your ideology is. But if both of those things was what you ended up saying, that’s just you being bad at elementary economics, because there is no such thing as a free lunch, regardless of what your preferred solution is. You can have inequitable outcomes today and therefore a relatively more efficient outcome tomorrow, or you can have equitable outcomes today and therefore a relatively more inefficient outcome tomorrow.
    Equity today and efficiency tomorrow is like those real estate ads offering you high returns and low risk – it doesn’t happen.
  7. Which brings us back, in a very roundabout fashion, to the point that Gulzar Natarajan was making in his post. When he says that “it is not one decision, but a series of continuing, even interminable, decisions”, I interpret it as two different but very related things.
    One, if you’ve chosen to optimize for equity today, you have to be explicit about the fact that you’ve sacrificed optimized efficiency (today and tomorrow). The worst manifestations of these sacrifices must be adjusted for at the margin. And ditto if you’ve chosen to optimize for efficiency today! You have to be explicit about the fact that you’ve sacrificed optimizing for equity (today and tomorrow). The worst manifestations of these sacrifices must be adjusted for at the margin.
    Two, no matter what your favored path is (and I envy you your conviction if you know that your path is The Best One For All, I really do), there will be errors along the way. That’s just life, there will be unexpected surprises along the way. Call it risk, or uncertainty, or whatever you like (and yes, I know, comparing the two is like comparing Knight and day) – but account for the fact that your battle plan will meet the enemy, and it will not survive.
    You must adapt, and said adaptation will involve a series of continuing, even interminable decisions.
  8. Those adaptations will land you somewhere in the middle of efficiency and equity. At which point, you can adapt your will to your circumstances and say you’ve found the truth, or you can continue with your decision-making. It is, after all, interminable.
  9. “Wait, so there’s no end to this?!”, I hear you ask in righteous indignation. “What is the eventual outcome? Or are we doomed to keep making these interminable decisions forever?”. Kids these days, I tell you. They’re just like kids in those days.

And that’s why I say what I did at the start of today’s post. The only change I’d make is the addition of one word:

The ability to exercise good judgment recursively is the binding constraint in development.

A Fine Unbalance

“The person we are talking about was born in Germany, in 1915. He took part in anti-Hitler protests in the early 1930’s, and had to flee to Paris as a seventeen year old to escape persecution back home. He later attended lectures by Lionel Robbins and Hayek while in London, and also participated in the Spanish Civil war. In the interim, he also helped thousands of Jewish refugees escape Nazi persecution in France – among them, Hannah Arendt, Marc Chagall and Marcel Duchamp. He managed to do all this at or before the age of twenty-five. He would go on to become one of the most famous development economists of the 20th century.
Who are we talking about?”

You might know the answer to this question if you are a very good quizzer, but you may not know the answer even if you are a very good economist. And that’s because of two reasons.

One, Albert O. Hirschman isn’t as celebrated as he should be. Consistently underrated, you might say.

And second, we in the economics teaching profession don’t like to tell stories about economists. We like to bore people to death with equations and models, but making the economist behind the theories come alive? Doesn’t happen nearly as often as it should, if you ask me.

Watch about a minute or so of this excellent interview from around the 30 minute mark. As always, please watch the whole thing, it’s a great interview – but for the purposes of today’s post, just for about a minute or so from the 30 minute mark.

And Alex is bang on when he says that knowing that the person is French will often tell you more than the fact that the person is an economist. I’d go a step beyond and say that it is not just the location, but also the time that matters. A French person born around 1930 will be a very different person from a French person born in 1980, for example. This isn’t about who is better or worse compared to the other, this is about understanding why those people created the things that they did. And part of this understanding comes from understanding the time and place of their birth. Not just knowing the time and place, mind you, but understanding it.

And to understand why Hirschman was the kind of economist he was, you need to understand where he came from, all of what he experienced in his formative years – and the cultural milieu that surrounded him when we was an economist.

And it is for this reason that reading this blogpost about Hirschman’s work, but also his biography is ever so illuminating. You don’t just get a sense of Hirschman’s central ideas, but you also get a sense of how events in his life formed his worldview, and possibly influenced some of his decisions later on.

He encourages us to see the inevitable pitfalls and stumbles of the growth process not as disappointments, but as opportunities, and gives us a conceptual language to identify them. For randomistas-in-training, steeped in the world of deworming and bed-nets and pre-analysis plans, Hirschman also reminds us that we need to step back from individual interventions more often and think more about development strategies–not just how different projects can complement each other, but also how each project might organically summon market and non-market forces to help growth along.
The Credibility Revolution has yielded, perhaps for the first time, robust evidence for individual program effects. The time is ripe, not to copy Hirschman’s ideas wholesale, but to borrow his clear-eyed approach and think carefully about how projects can be brought together, pressure point by pressure point, into programs for sustained development.

https://www.global-developments.org/p/the-real-development-was-the-friends

This is worth doing for everybody of note, of course, not just Albert O. Hirschman – but if you are a fan of studying the development of the field of development economics, this would be a great place to start.

Lots of homework in today’s post:

  1. Watch Transatlantic (it is available on Netflix)
  2. Read The Worldly Philosopher, by Jeremy Adelman
  3. Read The Strategy of Economic Development, by Hirschman

The Economist on The Middle Income Trap

But first things first: what is a middle income trap?

Here’s my assistant’s answer:

The middle-income trap is a concept that describes a situation where a country’s economy gets stuck in a middle-income range, and it struggles to advance to higher levels of development.
To understand this, we need to first know about development economics and growth theory. Development economics is the study of how countries become richer and more developed over time. Growth theory is a part of development economics that studies how economies grow and what factors help or hinder growth.
Now, let’s go back to the middle-income trap. When a country starts to develop, it usually grows quickly and becomes a middle-income country. However, some countries find it hard to keep growing and end up getting stuck in this middle-income range.
The problem is that these countries face new challenges when they reach this stage. For example, they may have to compete with cheaper goods from other countries, or they may need more advanced technology to keep growing. These challenges can be difficult to overcome, and the country’s growth slows down or even stops.
This can be a problem because being stuck in the middle-income trap can mean that a country’s people do not get richer over time, and the country may not be able to provide the same opportunities as wealthier countries.
To avoid the middle-income trap, countries need to keep innovating and adapting to new challenges. This can involve investing in education and training, creating new technologies, and finding new ways to do things. By doing this, a country can keep growing and move towards becoming a high-income country.

https://chat.openai.com/chat

So which countries find themselves in the middle income trap? The Economist has a lovely chart within an article that helps us find out the answer to this question

https://www.economist.com/finance-and-economics/2023/03/30/which-countries-have-escaped-the-middle-income-trap

As a country, you want to be in the top row, since that implies you are doing well today. You do not want to be in the bottom row, since that implies that you are not doing well today. Things get interesting in the row in the middle.

The first column (read left to right) in the middle row is a great story. You were “low” in 1960, and are “middle” today, so you’ve covered impressive ground, and are hopefully on your way up from here on in. The third column (read left to right) in the middle row, is a problematic story (to put it mildly). You were “high” in 1960, but have reached “middle” today.

The square bang in the middle? That’s the middle income trap.

These are countries that were doing relatively well back then, in 1960, and are doing relatively well today – but in the sense that there hasn’t been a relative improvement, they find themselves in a middle income trap.

What does “relatively well” mean, and what does “relative improvement” mean? Take China as an example – China was a middle income country in 1960 (it falls in the middle, read left to right), and it is a middle income country today (it falls in the middle, read bottom to top). That’s not to say that there has been no improvement for the Chinese since 1960, of course! There has been remarkable improvement.

But relative to the USA, China was in the middle of the pack in 1960, and finds itself to be middle of the pack in 2022. Therefore the middle income trap.

Even within that square itself, by the way, there are stories to be discovered. If you are in the right top of that square (Mexico, for example), you were on the verge of becoming a high-income nation in 1960, and you are on the verge of becoming a high income nation today, but you haven’t actually achieved that status as of yet.

If you are in the top left of that square in the middle, you were barely better than low income in 1960, and are about to break through the metaphorical ceiling today (China, for example). India hasn’t moved much within that middle square, and that is therefore a frustrating story for us in India.

Homework: how would you describe Nicaragua’s position in this graph? Is it better off or worse off over these past sixty years or so?

Finally, you might also want to think about whether the middle income trap is such a bad thing in the first place!

Poland and Malaysia may now be running into this [he’s referring to the middle income trap here – Ashish] problem. McKinsey cites Poland’s need to develop or acquire strong brands in order to catch up with West Europe. The failure of Malaysia’s attempt to build domestic champions is worrying.
And yet I see two responses to this. The first is: Do we really care? Poland and Malaysia may not be as rich as Germany or Korea, but they’ve definitely escaped poverty. Countries like Bangladesh or Vietnam or Ghana or even Mexico would kill to have a per capita GDP of $30,000. That’s about the GDP of the U.S. in the early 1980s. Is it really fair to call that level of development a “middle income trap”? If you’re a poor country, and you have a reliable, dependable way of getting as rich as the U.S. was in the early 1980s, dammit, you take it. You don’t worry about whether that strategy will eventually make it harder to get as rich as the U.S. of 2023.

https://noahpinion.substack.com/p/the-polandmalaysia-model

Let me be clear – I am not saying (and I don’t think Noah is either) that more growth is a bad thing. But a targeting of rapid growth at all costs, and above all else, isn’t necessarily a great idea.

Why not? Because opportunity costs matter! At what costs (to the climate, to the distribution of income, to the development of social capital, to give you just three examples) do we achieve this growth? Remember, the answer to the third question depends on how you define the word “better”.

I’ve said it before, and I’ll say it again: macro is hard.

Hedging, FDI, Poland and Malaysia

Noah Smith has a typically excellent explainer on the role of industrialization in Poland and Malaysia, itself only a single post in a long running series on the same theme. As one might expect if one is a fan of How Asia Works by Joe Studwell, the post begins by talking about industrial policy in South Korea. From that point of reference, he delves deeper into what made Malaysia and Poland grow so very vigorously over the past three decades or so. He also speaks about the limits of the strategies adopted by these two nations towards the end of this post, but more about that later on. For the moment, I would encourage you to read this post, and to subscribe to his Substack, as I have. Phull paisa vasool, guaranteed.

Also, because I simply cannot resist, a request to all of you to ponder this chart. How can one not want to learn macro after thinking about this chart?

But before we get back to Noah’s post, a brief segue into a post I wrote a while ago:

Here is how the placement process works in almost all colleges in India. If you sit for an interview, and you’re made an offer, you’re “out” of the placement process. There are variations to this rule, but in essence, the logic is that once you and the company have struck a deal, you can’t sit for any other firm that comes on campus later.
So here’s a conundrum for you: what if the company in October is a firm called HDFC, and it is offering you a package worth 8 lakh rupees (INR 800,000). The conundrum is that there is a very strong rumor (but it is, unfortunately, a rumor) that Google will be on campus next month, and they’ll be offering 20 lakh rupees (INR 2,000,000).
HDFC will pick up 20 students, but Google will pick up only 5.
Do you sit for the HDFC process or not?

https://atomic-temporary-112243906.wpcomstaging.com/2021/02/01/so-what-are-forward-markets-what-is-speculation/

What is your answer to this question? If you were that hypothetical student, would you sit for the HDFC process, or not? I’d argue it comes down to whether you are looking ot maximize your ‘profits’ or minimize your ‘risks’. If you’re the sort of person who would like to play it safe – if having a job, any job, is more important to you than having the high paying job of your dreams – then you’re likely to sit for the HDFC job process.

Note that there is no right or wrong answer here. It simply is a question of your preferences.

All right, now back to Noah’s post.

Poland and Malaysia may not be as rich as Germany or Korea, but they’ve definitely escaped poverty. Countries like Bangladesh or Vietnam or Ghana or even Mexico would kill to have a per capita GDP of $30,000. That’s about the GDP of the U.S. in the early 1980s. Is it really fair to call that level of development a “middle income trap”? If you’re a poor country, and you have a reliable, dependable way of getting as rich as the U.S. was in the early 1980s, dammit, you take it. You don’t worry about whether that strategy will eventually make it harder to get as rich as the U.S. of 2023.

https://noahpinion.substack.com/p/the-polandmalaysia-model

The issue that Noah is speaking about here is about whether option A is better or option B is better. Option A is the South Korean way, as he mentions in the next paragraph after the one I have excerpted here. This is done by ‘building a bunch of world-beating high-tech manufacturing companies from scratch’ and it is, as he says, incredibly hard. The good news is that if you get it right, you can get seriously rich as a country. The bad news is that very few countries have managed to get it right.

What is option B?

An FDI-centric strategy, on the other hand, is simple and straightforward, almost cookie-cutter — you give all your people a high school education, you build some roads and electric power lines and sewage lines, you designate some Special Economic Zones, and you give foreign companies big tax incentives and investment incentives and regulatory incentives to come in and hire your plentiful low-wage workers to make electronics and automotive goods and other complex products for export. Voila! No need to build the next Samsung or the next Hyundai; the existing Samsung and Hyundai will do nicely.

https://noahpinion.substack.com/p/the-polandmalaysia-model

The analogy that I am trying to develop here is a fairly obvious one. Option A is like Google coming to your campus. Only a few jobs on offer, and we don’t yet know for sure whether Google will actually come on campus or not. In other words, a high risk strategy. If it pays off, well, whoopee. But on the other hand, if it doens’t pay off, you’re in deep doo-doo.

Option B is like HDFC coming on campus. Relatively speaking, you’re much more likely to succeed in this endeavor. The downside? If you succeed, it won’t payoff as much as succeeding with Option A. But just as there will be students who will prefer Option B, Noah says that some countries also ought to choose the Malaysia-Poland route. Sure the success here isn’t quite as ‘sexy’, but it also does come with lower risk. And this ought to be, for some countries, therefore a very attractive proposition.

So if Poland and Malaysia haven’t found the secret to getting rich quick, perhaps they’ve found the secret to getting upper-middle-class quick. That wouldn’t be a full general solution to the problem of industrialization, but it would represent an amazing advance over what we know now. If I were a poor country, this is what I’d be looking at.

https://noahpinion.substack.com/p/the-polandmalaysia-model

Risk-rturn trade-offs, industrial policy, opportunity costs and an introduction to finance, all rolled into one smorgasbord of a blogpost. I enjoyed writing this one!

Steady As She Goes

Gulzar Natarajan has a typically excellent post (part of a two-part series) on India’s economic growth trajectory. And they key point in the post is a counter-intuitive one.

India cannot, and should not, grow too rapidly.

In Can India Grow, we had argued that India does not possess the capital foundations to sustain high rates of growth for long periods. It does not have the physical infrastructure, human resources, financial capital, and institutional capabilities to grow in the 7-9% ranges without engendering serious distortions and overheating. The last such episode of high growth in the 2003-11 period required nearly a decade for companies to deleverage and for banks to overcome their bad assets. While some commentators have since come forth with similar views citing aggregate demand etc, I think we were the earliest to put forth a clear case for lowering expectations and targeting a 5-6% economic growth rate.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

Our household owns two cars, a Tata Zest and Tata Nano, and the best analogy I can come up with for 2003-2011 is that it was like racing the Nano along the expressway to Bombay at a 110 kilometers per hour. It might (perhaps) have made it to Bombay at those speeds, but the little blue car would then have needed a long time at the mechanic before being road-worthy again. India, similarly, did grow rapidly in that period, but as Gulzar Natarajan puts it, it did not have the “physical infrastructure, human resources, financial capital, and institutional capabilities to grow in the 7-9% ranges without engendering serious distortions and overheating.”

Or put another way, if we want India to grow rapidy in the next two decades or so (and who wouldn’t?), it is very much a question of whether we’re driving a Nano or a Zest over the course of the next two decades. Or, god willing, an even better car. But a Nano will simply not cut it, and in terms of our infrastructure, human resources, financial capital and institutional capablities, we’re more like Tata’s cheapest car than we are like the Tata’s most expensive car.

But our country needs those upgradations if we want to achieve (and sustain) those aspirational growth rates. And here’s another counter-intuitive bit: even a 6% growth rate would be a challenge when we are talking about sustaining it over the course of twenty long years. That’s not the pessimist in me talking, that’s empirics:

A 6% baseline growth for the next three decades would be extraordinary. Underlining this point, as Ruchir Sharma has written, there are only six countries which have grown at 5% for four decades – Taiwan, Japan, South Korea, Singapore, Malaysia, and China. As the data shows, India has become the seventh. But just two have done it for five decades in a row – South Korea and Taiwan. Given that China looks certain to fall short, India could become just the third. It could go one better and strive to become the only country to grow at 5% for seven decades in a row. This would be exceptional at a time when developed countries will struggle to grow at even 2%.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

But for that to happen – for us to embark on this journey, we would do well to first take the Nano to the garage, and bring out the Zest instead. We could do with a bigger engine, better suspension, better safety features – why, better everything:

We should simultaneously use the growth to build the capital foundations – increase domestic savings, deepen financial inclusion, develop robust financial intermediation systems, expand physical infrastructure, prioritise human capacity development, and develop and strengthen state capabilities.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

All of which is easier said than done, as many a “growth star” state of the 20th century will tell you. This stuff is hard, unglamorous, politically risky, and with payoffs that manifest themselves only in the long run. But also, this stuff is unavoidable. Here’s one way to think about it as a student of economics: studying macroeconomics without a deep study of development economics is dangerous.

For as a nation to our north and east is hell bent on showing us in recent times, attemptig rapid growth without getting the basics right isn’t a good idea:

A too rapid growth will invariably drive up signatures of overheating – high inflation, property bubbles and land valuations, spike in wages, environmental damage, clogged infrastructure like traffic congestions and water scarcity etc.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

Institutions matter. Education matters. Physical infrastructure matters. State capacity matters.

And attempting to engineer rapid growth without getting all (not some, all) of these right is a bad idea.

P.S. If you are a student of the Indian economy, the first chart in this blogpost is worth deep contemplation and reflection. What is your best guess for what comes next, and why is your guess whatever it is? That’s be an excellent essay to assign at the end of a macro semester that focuses on the Indian economy.

The Long Reads on The Long Road To Breaking Free

Last week marked the 75th anniversary of our Independence. A lot of reflective essays were written to mark this special occasion, and some of them made for excellent reading.

But as a student of economics, I haven’t found anything better than a fantastic essay written by Niranjan Rajadhakshya in the Livemint. It makes for excellent reading, and there is enough material in there to keep students busy for years, let alone a semester. And I simply cannot do justice to the entire article in one blogpost.

So what we’re going to do is that we’re going to spend this entire week going through this article at our own leisure. I’ll give a broad overview today, and we’ll explore some of the finer nuances in the other four blogposts to come this week.

Let’s begin with the title itself. I don’t know if the choice of headline was intentional, and it is usually the case that the headline is not chosen by the author of the piece. But that being said, surely this is a nod to an excellent book written by Vijay Joshi? I, at any rate, interpret it as such, and strongly encourage you to read the book if you haven’t done so already.

Most essays would have begun with a nod, at the very least, to Pandit Nehru’s speech on Independence Day. It remains an excellent speech, and worth a re-read (or re-listen, if you so prefer). But Niranjan begins his essay with a quote from Sardar Patel instead, underlining the need for an economic regeneration in India’s case.

What might this entail? Niranjan highlights four major problems:

  1. Stagnation of economic output
  2. A chronically underfunded state
  3. A dire food situation
  4. A narrow industrial base centered around a few large cities

For each of these things to improve, Niranjan says, we needed a structural change in the way the Indian economy functions.

  1. People needed to move from farms to factories
  2. Almost consequentially (my interpretation, not Niranjan’s statement), we needed more urbanization
  3. And finally, we needed to move from household enterprises to formal enterprises

Why are these changes necessary in order to bring about a structural change in the Indian economy, and why is a structural change deemed necessary? These are excellent questions to ask if you are a student of economics. And the answer to these questions is a great way to begin your journey into the world of development economics.

But very simply put, here are the answers:

  1. Farms alone would not be able to generate the kind of surpluses necessary to raise the incomes of Indians, and certainly not as fast as was required.
  2. Try plotting per capita incomes for nations versus their rates of urbanization.
  3. Reflect on each of the figures in this paper (read the whole thing if you can, but please do look at all the figures)

Reflect on two paragraphs, which I will excerpt here without additional comment:

The famous dissent of economist BR Shenoy provided four red flags. First, the heavy dependence on deficit financing to build industrial capacity would lead to balance of payments pressures. Second, the focus on capital goods rather than wage goods for mass consumption would be inflationary, as people employed in new industries would get money incomes but nothing to spend them on. Third, high taxation to finance the plans would weigh on citizens. Fourth, increasing government control of the economy would eventually harm Indian democracy.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

In his landmark budget speech in July 1991, Manmohan Singh cogently argued that the balance of payments crisis was a symptom of a deeper malaise: macroeconomic imbalances, low productivity of public sector investments, loopholes in the tax system, indiscriminate protection that had weakened the incentive to export, lack of domestic competition, a weak financial system that was not allocating capital efficiently, lack of access to the latest technology, and much more. The great achievement of 1991 was not each reform in isolation, but the rollout of a comprehensive reform programme where different parts complemented each other.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

Was it any surprise that the 1970’s were a lost decade? Was it any surprise that Amitabh Bachchan was an angry young man in the 1970’s? What if the budget of 1991 instead happened to be the budget of 1978 instead (or even earlier, now that we’re dreaming)?

To say nothing of the future! Niranjan ends his essay with four challenges that await us in the future:

  1. India needs to develop more, and develop more equitably at the same time? Is that possible, especially while remaining a political democracy?
  2. Jobs! Niranjan speaks of our inability to create quality jobs for the millions who are now leaving agriculture, but the problem is even more urgent, because not enough people are able to leave agriculture in the first place!
  3. What of energy? How are we looking to anticipate the problems that will inevitably crop up, and start thinking about how to deal with them?
  4. And Niranjan ends on what I interpret to be a quasi-pessimistic note by asking where we will find ourselves in 1947. The reason I find it to be a quasi-pessimistic ending is because if the answer to this question isn’t clear by now, that ought to worry all of us. It certainly worries me.

We’ll take a look at the first two decades, roughly speaking, of India post independence tomorrow, using this excellent column as a reference. See you tomorrow!

Is There Such a Thing as Development Economics?

Alex Tabbarok says no:

I used to think there was such a thing as development economics. There are still richer and poorer countries, of course, but is there a “development economics,” a special type of economics for poor countries? I don’t think so. Maybe there once was. In the twentieth century, divergence in per-capita GDP increased big time and it was a burning question why poor countries weren’t on the same development path as the developed nations. Starting around 1990-2000, however, we have seen convergence. Most countries are now on the same path. Poorer countries and richer countries are becoming more alike, sometimes for good and sometimes for bad.

https://marginalrevolution.com/marginalrevolution/2022/08/there-is-no-such-thing-as-development-economics.html

Here’s the Wikipedia article on what constitutes development economics:

Development economics is a branch of economics which deals with economic aspects of the development process in low- and middle- income countries. Its focus is not only on methods of promoting economic development, economic growth and structural change but also on improving the potential for the mass of the population, for example, through health, education and workplace conditions, whether through public or private channels.

https://en.wikipedia.org/wiki/Development_economics

Both Alex’s definition and the Wikipedia definition focus on how low- and middle- income countries need a different kind of economic theory when it comes to growth in these parts of the world. But why do these countries need a special kind of economics?

I suspect an answer most economists would agree on (talk about courting controversy!) is that these countries are likely to have a poorer quality of institutions and property rights. The legal system may not work as well as intended and the quality of political institutions might be worse along at least some dimensions, and that’s just for starters. So it’s not so much the case that a special kind of growth theory is needed, but that some of the assumptions underpinning the model are fundamentally different.

But as Alex mentions in his post, these assumptions may not be applicable, because convergence has taken place. The post is difficult to extract from, and I would recommend that you go ahead and read it in its entirety. But perhaps the most surprising thing in Alex’s latest post is the fact that this convergence has happened because poorer countries have caught up, more or less – but also because richer countries have become worse along some dimensions:

More generally, poorer and richer countries face many of the same problems today: infrastructure, low-skill workers and technological change, climate adaption and so forth. Is the latest paper on cash transfers, pollution, or corruption about a poor country or a rich country? It’s hard to tell. Poor countries still have their own unique problems, of course, but those problems are best analyzed by country rather than by income category. India is not the same as Thailand or Peru. I see little that unites poor countries under the rubric development economics.

https://marginalrevolution.com/marginalrevolution/2022/08/there-is-no-such-thing-as-development-economics.html

And anecdotally, I’m sure we’ve all experienced ways in which poorer countries are not just better off than before, but also have materially better institutions and processes.

The question is, does that then mean that there is no longer such a thing as development economics?

I would disagree with Alex’s stance, and say that development economics very much remains a relevant subject, and that for two reasons.

First, because with convergence, we’re not answering the same question that we were earlier – it is not so much about the fact that we need to focus on how to have poor countries grow faster, but just about how to make the world grow faster. There still remain, to be clear, countries that remain poor, and even within countries that have developed faster, there are regions that remain poor – but the focus of development economics should be different today than it was, say, in the 1960’s.

But that brings me to my second point. I define development economics slightly differently. When I take classes on development economics, I say that this is a subject that tries to find out the answer to three questions:

  1. What does the world look like?
  2. Why does the world look the way it does?
  3. What can we do to make the world a better place?

And viewed from this framework, it is the answer to the first question that has changed from about sixty years ago. Figuring out why it has changed is now a fascinating part of development studies. And the lessons one can learn by thinking about this helps us try and figure out what we can do to make the world a better place. To give you just one of many possible examples, you might want to think about which factors helped South Korea grow so rapidly in the last six to seven decades, and then ask which of these factors are replicable in an Indian context today. Not all factors will be applicable, and India today is not what India was back then, nor is it today what South Korea was back then.

Also, Pakistan cannot learn the same lessons that India might, because the ground reality in both countries is different in terms of resources, climate, geography, population, income levels, political institutions and so much more. And Sri Lanka will have a different set of lessons that are applicable, and all the African nations is a whole other story… and well, so on. Alex mentions this in his blogpost, of course.

But while it is true that there is little that unites poor countries today under the rubric of development economics, I don’t take that to mean that there is no such thing as development economics. Rather, I would argue that this simply means that the low hanging fruit in development economics have been picked, and development economics has now become an even more challenging and interesting field than before.

But “what can we do to make the world a better place?” will forever remain a valid and urgent question, so development economics, for me, will remain a fascinating subject to think about.

Lant Pritchett Advises Us To Zoom Out

I would much rather that you only read his post, because it is a wonderful, wonderful piece.

But if you insist on a key extract, this would be it for me:

…we development economists should keep in mind that sustained economic growth is empirically necessary and empirically sufficient for reducing poverty (at any poverty line) whereas targeted anti-poverty programs, while desirable, are neither necessary nor sufficient

https://lantpritchett.org/development-work-versus-charity-work/

Again, please, read the whole thing.

Lant’s point in his blogpost is asking what will give the biggest bang for the buck in terms of developmental work. He reviews a paper which “shows that adding a “psycho-social” component to an anti-poverty program in Niger is enormously cost-effective, as it had similar impacts as adding a cash grant but was much less expensive”.

You may get the impression, while reading the blogpost, that Lant Pricthett is being a tad sarcastic. But I don’t think he is – he is truly appreciative of the quality of the work done in the paper, and thinks that the conclusions are truly solid. But, he says, the paper rigorously and correctly answers a question that is, in itself, a completely wrong one.

The development question is: “How can the people living in Niger come to have broad based prosperity and high levels of wellbeing?” The charity question is: “If some agency (perhaps of a government) is going to devote a modest amount of resources to targeted programs that attempt to mitigate the worst consequences of a country’s low level of development, what is the most cost-effective design of such programs?”

https://lantpritchett.org/development-work-versus-charity-work/

Not enough people working in development, Lant seems to say, focus on the truly big picture question in development economics – how can we have broad based prosperity and high levels of well-being? Instead, we focus on improving the cost-efficiency of a program that “attempts to mitigate” the ill-effects of poverty.

To use an analogy, Lant is saying that medical researchers who focus on improving the quality of aspirin by, say, 5% might do better by trying to understand what is causing the headache in the first place. Get rid of the cause, rather than trying to incrementally improve the cure.

But the larger point from his blogpost is applicable to much more than development economics. Don’t try to make your existing solution to anything incrementally better, ask if eradicating the underlying problem itself is possible.

And if it is, work on that.

Lant Pritchett on Afghanistan

As we will learn in today’s post, the principles that we will learn from this marvelous essay are applicable in so many other contexts.

First, the title of his essay:

A Quickly Made Long Tragedy

Here’s one way to understand what this means in practice: the advantage of a top-down decision making system is that decisions can be made quickly. The opportunity cost of such a system is that buy-in from every person involved with the system is not only difficult to get – it is difficult to ascertain in the first place. As Akshay Alladi puts it over here:

What does Lant Pritchett mean when he says a “quickly” made “long” tragedy? The decision making was quick, sure – implementing said decisions on the ground proved to be rather more tricky. And it took twenty years to understand that in this case, more tricky was, in fact, a euphemism for “was never gonna happen”.

Second, talk about connecting the dots as a writer!

How can one not fall in love with an essay that:

  1. is written by an economist
  2. uses basic physics
  3. uses Shakespeare (!)…
  4. uses medicine
  5. … to explain how sociological concepts
  6. … can be used to understand how political goals
  7. … were never going to be achieved…
  8. … and all this using a diagram that absolutely anybody could understand?
https://lantpritchett.org/afghanistan-2021-a-quickly-made-long-tragedy/

Third, this excerpt:

I am a very visual person so I propose this diagram as an aid to understanding the tragedy, for both the USA but much more so the people of Afghanistan, of the US engagement

https://lantpritchett.org/afghanistan-2021-a-quickly-made-long-tragedy/

If you’re a student, this is an important lesson. Figure out what type of learner you are, and that as quickly as possible. Do you prefer to understand a concept by drawing a diagram? Or by writing down an equation? Or by writing down your understanding in words? You’d be doing yourself a favor by trying to get better at all three, but any subject becomes easier when you try to figure out how you learn best. Double down on that method and get excellent at it. Try to get better at the other methods sure, but be unapologetic about the method that works best for you.

The entire essay is worth reading, and multiple times. But when you consume anything (a video, a movie, a podcast, a textbook – anything) always ask what else you can learn from it, apart from the intended lesson itself.

It is A Very Underrated Skill indeed!

The Rules of The Game

A fascinating, thought-provoking thread on the recent Chinese crackdown on tech. We covered this earlier this week, but the thread is worth reading and reflecting upon. Also note Lillian Li‘s background, if you are a student of economics. Studying development economics is not “cool”, got “nothing to do with finance”? Think again. Or, at the risk of being a little meta, ask yourselves about the rules of the game.