Abstract
‘Fforde’s book Understanding Development Economics: Its Challenge to Development Studies is a detailed study which aims to introduce development economics (DE) to those coming from two different but linked perspectives: that of economists and that of students of development who are not economists (p. xvii). The modest scale of its applications comes as no surprise. Social sciences are unfortunately often divided by impenetrable disciplinary boundaries. In management, leadership theories are usually developed by psychologists who study people’s motivations at the ‘micro’ scale. Similarly, in DE where the focus is on human wellbeing at the aggregate level of the entire world, or individual countries or social social groups, Sen’s Capability Approach emerged as highly influential.
The discipline of macroeconomics, which started in the late 1940s, is based on the assumption that the private sector is primarily concerned with maximizing profits. As a consequence, microeconomics has, in its short history, not engaged with what happens when the private sector is orientated primarily to minimizing debt. In this way microeconomics has both neglected to study the dynamics of actual economics during key historical phases, as well as overlooked many key determinants of economic growth that have been either taken for granted or conveniently assumed away in traditional economics. The muchtouted policies of quantitative easing and zero or even negative interest rates also lose their effectiveness when the economy is in this other phase. With the lack of economic growth and wage growth in particular becoming a major issue in most advanced countries, it is time for the economics profession to discard its assumptions of convenience and face the other (as yet unstudied) half of macroeconomics head-on.
The failure of the vast majority of economists in government, academia and the markets to predict either the post-2008 Great Recession or the degree of its severity is raising serious credibility issues for the economics profession. The widely varying opinions of these ‘experts’ on how this recession should be overcome are also making the public and political leaders rightfully suspicious of economists. Nor are the repeated failures of central banks and other policymakers to meet their inflation or growth targets helping the matter. This book seeks to elucidate what was missing in DE all along and what changes are needed to make the profession relevant for society again.
Unfortunately, for many countries, measures such as quantitative easing and negative interest rates are often described as ‘favouring the rich’ and are therefore rejected. For emerging economies with plenty of low-hanging investment opportunities, such opposition may not lead to a noticeable economic slowdown. But for mature economies that are being chased from behind and must therefore run faster, an inability to fully utilize the creative and innovative potential of their people could have highly detrimental consequences for everyone. For those countries in the developed world now facing this challenge from the emerging world, future growth may well depend on how quickly they can achieve a social consensus and develop the necessary infrastructure, such as true liberal arts education and an innovator-friendly corporate culture and tax system, to maximize their innovative capacity.
This may require the creation of a new consensus, where those who are not blessed with the ability to think outside the box can understand and appreciate the fact that their wellbeing is dependent on those who can. Indeed, the whole society must understand that such thinkers are essential in generating new investment opportunities to keep the economy out of prolonged stagnation.
There is a curious phenomenon that social scientists call the ‘resource curse’ or the ‘paradox of plenty’. Countries with large endowments of natural resources, such as oil and gas, often perform worse in terms of economic development and good governance than do countries with fewer resources. Paradoxically, despite the prospects of wealth and opportunity that accompany the discovery and extraction of oil and other natural resources, such endowments all too often impede rather than further balance and sustain economic development.
According to the traditional growth literature, natural resources enhance economic growth. They are used as inputs in the production process to generate high levels of output. The idea that resource abundance is more a curse rather than a blessing emerged in the 1980s. The author argues that Japan and the Asian Tigers (Hong Kong, South Korea, Singapore and Taiwan) all achieved booming export industries based on manufactured goods and rapid economic growth without large natural resource reserves. On the other hand, many natural resource-rich countries have struggled to create self-sustaining economic growth and have even succumbed to deep economic crises. It seems that natural resources have helped to raise living standards while failing to produce self-sustaining growth. Controlling for structural attributes like institutional quality and openness, resource-rich countries grew less rapidly than resource-poor countries during the last quarter of the 20th century. Nations that rely on natural resource exports tend to neglect the development of their human capital because they see no immediate need for it. Put differently, abundant natural capital may crowd out human and social capital, as states seem to forget the need for diversified and skilled workforce that can support other economic sectors once resource wealth has dried up.
Professor Fforde implies that at the most fundamental level, the economics profession must realize that, apart from the early stages of industrialization, which are characterized by a surplus of easy investment opportunities, shortages of borrowers have always been a bigger problem for growth than shortages of lenders. Instead of making the facile assumption that there are always willing borrowers, economists need to confront this problem head-on. The availability of investment opportunities and willing borrowers should never be taken for granted, especially in countries that are in balance sheet recessions or are being pursued from behind, a group that includes every advanced country in the world today.