Thursday, September 30, 2010

Democratizing development economics

The World Bank Group’s President Robert Zoellick argues that development economics as of now is not “democratic” enough and it must broaden scope of the questions it asks to make it more relevant to the challenges of the present world and policymaking. His suggestions: Focus on empirical evidence but don’t always go after data as it does not capture everything; try to encompass the experiences of successful emerging economies; and do not follow blueprints.

But it is appropriate to ask: Where has development economics brought us? Is it serving us well?

Even before the crisis there was a questioning of prevailing paradigms and a sense that development economics needed rethinking. The crisis has only made that more compelling.

A great deal of progress has been made over the last several decades: in health, education, and poverty. The share of people living in extreme poverty in developing countries has more than halved in the quarter century since 1980; global child mortality rates have almost halved.

But success has been uneven; countries are frustrated by the lack of progress on overcoming poverty and achieving the Millennium Development Goals, a useful yard¬stick to measure progress.

Most of the fall in poverty has occurred in East and South Asia and Latin America. While the world will meet the MDG target of halving the number of people living in extreme poverty by 2015, progress in Sub-Saharan Africa, despite some notable recent gains, still lags. Progress at the country level is even more uneven: Only 45 of 87 countries with data have already achieved or are on track to achieve the poverty target.

[…]The success of China and others has raised questions on the role of the state. What are the effective and proper roles of government ---- Enabler? Referee of fair and clear rules? Empowerer? Investor? Owner? Or anointer of winners?

The benefits of globalization and reform have yet to reach many of the poor. Many see the economic policy prescriptions of the Washington Consensus as incomplete -- lacking attention to institutional, environmental or social issues, or simply lacking as a guiding philosophy.

Others herald “orthodox” policies as helping developing countries navigate the crisis, pointing out that some developed countries strayed from orthodox lessons of finance and budgeting to their peril.

[…]Emerging economies are now key variables in the global growth equation. The developing world is becoming a driver of the global economy. Much of the recovery in world trade has been due to strong demand for imports among developing countries. Led by the emerging markets, developing countries now account for half of global growth and are leading the recovery in world trade.

We see a similar trend in the global development landscape, with developing countries assuming important roles alongside traditional development partners. These new partners are contributing not only aid, but more importantly are becoming major trading partners and sources of investment and knowledge. Their experiences matter.

Yet for too long prescriptions have flowed one way. A new multi-polar economy requires multi-polar knowledge.

With the end of the outdated concept of a Third World, the First World must open itself to competition in ideas and experience.

The flow of knowledge is no longer North to South, West to East, rich to poor.

[…]Yes, there are some basic principles we can follow: a belief in property rights; contract rights; the use of markets; getting incentives right; the benefits of competition within and across economies; the importance of education; macro-economic stability -- but we might learn these more from economic history than from economic models.

As the World Bank’s “Doing Business” reports have highlighted, small and medium- sized enterprises can flourish given an enabling environment that encourages – rather than blocks or constrains – the entrepreneurial spirit.

Beyond the basic principles, experience would suggest that we may need to consider differentiated policy approaches.

The right policies may differ across phases of development -- for example reliance on export-led growth versus domestic demand, or on different types of innovation, depending on the closeness of companies to technology frontiers.

The right policies may differ now from the 1970s given the changes brought about by the internet and the growing importance of supply chains in international transactions.

The right policies on financial regulation may differ across phases of development -- what may safeguard in one context may strangle in another.

[…]We need a deeper understanding of the process of how an economy’s structure evolves. This is not just about the shift from agriculture to industry and services over time.

Within agriculture, services, or industry, we need to know much more about the process of moving into higher quality goods and services, about what determines a country’s economic dynamism, and what contributes to the flexible adjustments in the structure of an economy.

I would maintain that a competitive market should be the economy’s fundamental mechanism for allocating resources. But there are market failures. There are also government failures -- including an inability to correct market failures. There is an important role for good governance, anti-corruption, and the rule of law, and governance will go beyond considerations of simple economic efficiency.

Here is a paper that provides an overview of the history of development research at the WB.

Six main messages emerge. First, research and data have long been essential elements of the Bank's country programs and its contributions to global public goods, and this will remain the case. Second, development thinking is in a state of flux and uncertainty; it is time to reconsider both the Bank's research priorities and how it does research. Third, a more open and strategic approach to research is needed -- an approach that is firmly grounded in the key knowledge gaps for development policy emerging from the experiences of developing countries, including the questions that policy makers in those countries ask. Fourth, four major sets of problems merit high priority for our future research: (i) securing economic transformation; (ii) broadening opportunities to participate in the benefits of, and contribute to, such transformation; (iii) dealing with emerging risks at all levels; and (iv) assessing the results of development efforts, including external assistance. Fifth, a new multi-polar world requires a new multi-polar approach to knowledge; the Bank must learn from, and collaborate with, developing-country researchers and institutes. Sixth, greater emphasis must be given to producing the data and analytic tools for others to do the research themselves and providing open access to those tools. And open data initiative needs to be extended to open knowledge. This will better inform development policy debates and allow for deeper engagement with the direct stakeholders in the outcomes of those debates.

Reaction from some economists here:

Nobel Prize-winning economist Michael Spence, who led a commission on economic growth, said Mr. Zoellick’s comments are “generally not only in the right direction, but very useful.” Harvard economist Dani Rodrik…. also praised the World Bank president. “The speech hits all the right notes: the need for economists to demonstrate humility, eschew blueprints…and focus on evaluation but not at the expense of the big questions,” Mr. Rodrik said.

But the reaction wasn’t unanimous. New York University economist William Easterly…called Mr. Zoellick’s comments “amazingly presumptuous.” He says the current system of economic research, where ideas are picked apart by other economists, works well. If anything, he says World Bank economists are often the exception because their bosses pressure them “to reach the ‘right’ conclusions,” Mr. Easterly said—meaning that World Bank loans are useful and foreign aid is productive.

The World Bank’s chief of research, Martin Ravallion, responded, “I have never been told what conclusions I should reach, and I doubt very much that anyone told Bill Easterly what conclusions he should reach in his many years working for the Bank’s research department.”