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SUMMARY The significance of development economics

Naqvi, S.

Professor Naqvi (1996) discusses the significance of development economics based on the
fundamentals concepts and the main critics against this economic field. He understand that
the purpose of development economics is “to isolate the elemental forces at work in
developing countries that raise per capita income, initially and then continuously, by exploiting
fully the inter-industry and inter-sectoral network of economies of scale, externalities, and
complementarities; it also analyzes the key factors that decide a fair distribution of the fruits of
economic progress, and those which enhance human happiness more directly”. This definition
seems to be aligned with the fundamentals of the economic science itself. However this
economic field is criticized by many authors in terms of its protectionism, its potential of
inefficiency of markets, its inward looking and its macro-oriented rather than micro-oriented
approach.

No other economic field has monopoly on the explanation of the development progress and
on the application of strategies to increase the rate at which the countries develop. Four
dimensions are identified on the field of development economics:

    1. “Stylized facts or the «regularities» of the development process over time and across
       couantries”. Physical accumulation, industrialization, trade and human capital
       formation
    2. Structural transformation which is the moving of resource from one type of economic
       activity to others that usually have a higher marginal productivity, capital
       accumulating capacity and added value.
    3. Economic wide dimensions. it is related to the understanding of different perspectives
       on the development process. It analyzes the «dynamics» of the system related to
       structural transformation, trade, human capital formation, health, accumulation,
       literacy etc.
    4. Experience of high-growth economies. It is based on the experienced of modern
       economies the way in which their macroeconomic stability and growth in GDP are
       related to distributive justice and a virtuous development circle.

The paper gives some highlights about the rival neoclassical theories. The Harrod model which
pays attention to population (labor) growth, savings rate and the capital/output ration as
variables of growth. Solow-based models which add technological change into the variables
and predict a no-growth equilibrium at the same technological conditions for every economy.
The long-run growth then will depend on technological change exclusively while the
technological process depend on the distance to the world’s technological frontier and
exogenous innovation through R&D activities. On the other hand Endogenous Growth Theories
(EGT) «engdogenizes» technological change as a function of the economic activities either as
learning externalities or direct expenditure on R&D. EGT allows sustained growth through
human ingenuity. (Naqvi) emphasizes that EGT cannot substitute development economics
because of stringed constraints; and the lack of variables related to structural change and fair
distribution (of the wider phenomenon of economic development).
TRADE AND GROWTH

Furthermore, the paper discusses the relationships between rate of growth, and some of the
misconceptions about them. The role of trade (export expansion EXE) in growth or at least its
superiority over protectionism (Import-substitution industrialization, ISI) seemed to be
confirmed by the success of the High-performing Asian economies (HPAE). However the
analysis does not take into account distribution fairness, not only within the country but also
the deterioration and problems of trade are imposed on the welfare of the developing
countries. Moreover the HPAE have also used efficient ISI, therefore the conclusion is that
both ISI and EXE are needed to boost such development. An intelligent combination of the two
approaches can lead to the best outcome as for the HPAE.

Trade over protectionism under the excuse of higher export rates is not a decisive factor since
[Even though protectionism may seem to lead to lower saving, less utilization of capacity,
unemployment and worse income distribution by increasing internal costs and inefficient
industrialization. ] trade has not be proven as completely superior because of ambiguity and
subjectivity of their indicators. Furthermore, increased exports are strongly correlated to GDP
growth nonetheless causality between these variables is not yet confirmed and is subject of
discussion, e.g. EXE may not lead to LONG-RUN growth but otherwise.

Additionally, world trade agreemments are usuallyunequal in distribution (more for developed
countries –more productive countries) and the externalities generated (commonly over
developing countries) are not compensated. E.g. the access of developing countries products
into developed countries markets is limited and in this case trade certainly in the short and
long-run benefits pioneers rather than late-runners. E.g. 2) reciprocity cannot be conducted by
both parties since developing countries cannot sustained some of the conditions that
reciprocity asks for and hence cannot make the most of the reciprocity offered by developed
countries. E.g. 3) Negotiations are generally in the power of the powerfull, therefore
reciprocity governs rather than free trade. E.g. 4) Some most liberalized countries did not
experience real development.

MARKET AND GOVERNMENT

There are critics about possible socialism, though there have not been any perfect laissez-faire
society… government always participates in certain degree. The fact is that the market would
be perfect, were this world perfect as well. Therefore the government through adequate
intervention can help the market avoid failure. E.g. if the technological change were
exogenous, government intervention would hardly have impact.

Government intervention is attacked because more welfare is lost due to government failure
than with market failure. Even this remain to be proven, the fact is that there are not real tools
to meet the perfect conditions the market requires to avoid failure, hence market failure is
always unavoidable. Therefore the compensation of externalities can only be targeted by the
government. In addition intergenerational concerns are difficult to be accounted for by the
current market. Other counterpoint against market is that even though there is corruption in
government (failure) in the market there is fraud that increases when the benefits are big
enough to overpass the honesty limit. Finally, government should deal with the regulation of
common property and goods and with R&D bottlenecks when most resources are devoted to
this activity rather than to food for example.

ETHICS AND DEVELOPMENT

Development economics deals with ethical objectives named the sharing of gains and fair &
equitable distribution of them. Therefore development analysis can never be reduced to self-
interest of neoclassical economy. Unfortunately development does not work closely together
with ethical issues (detached), i.e. ethical values are generally undermined by market
economies.

In this respect, development economics only supports self-interest in the sense of the invisible
hand. However this neoclassical view is considered as a result of economic rationalism, which
does not consider altruism and does not consider externalities (Pareto inequality).

Redistribution is seen as a violation of individual rights and to fight this conception
development economics need to defend redistribution in as much as possible a positivist way1.
To do so, utilitarism, Rawls theory, Kantian moral can be a tool to avoid circumstance-base
decisions.

           “development policy must aim to provide food and other primary goods needed by the
           least-privileged in the society; and issues such as the distribution of income and wealth
           should be relevant for development economics - even though the “equality of result
           implies a distribution process that is the antithesis of the market” (Coleman, 1989, p.
           52)2“

CONCLUDING REMARKS

          Neoclassicla does not talk about the growth promoting process of structural
           transformation.
          Precipitated privatization is also costly, market solution is not always the best (it is not
           always proven as so)
          Government intervention is also useful for market solutions
          Market and non-market solutions should be seen as complements rather that
           substitutes or opposites.
          Apply the concept of R&D spillovers and endogenous growth in development
           economics
          ISI -» trade but with and efficient and speedy transition “The secret of success, as in
           the case of the East Asian countries, is to make a speedy and efficient transition from
           one strategy-to another in response to the changing conditions of the world demand,
           and to expand the tradeable sector by making it science-based rather than resource-
           based”.
          Ethical rather than market-clearing oriented solutions
          DE is not essentially positivist but normative and prescriptive “all issues which carry a
           clear altruistic ethical motivation and which do not admit of a simplistic market-

1
    Positivism defend argument with rationalism rather tahn with subjetivity and intuition.
2
    I could not get this article
clearing prescription. The argument that the market-given freedom economizes on the
            use of scarce ethical resources (Arrow, 1972)3 is true to some extent; but the fact
            remains that altruism is not a scarce resource [I love it]; rather, it increases (decreases)
            with a more (less) frequent use (Hirschman, 1985, p. 362)4”.
           “it should be neither irrational to act morally nor immoral to act rationally” ethical
            values reduces the cost of market intervention, market failure and government failure.
           “The job of combining efficiency with justice and realism with compassion for the poor,
            the needy, and the downtrodden is difficult; but it must be done to change the world
            for the better.”



NAQVI, S. N. H. 1996. The significance of development economics. World Development, 24,
       975-987.




3
    I could not get this article
4
    I could not get this article

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The significance of development economics - Naqvi

  • 1. SUMMARY The significance of development economics Naqvi, S. Professor Naqvi (1996) discusses the significance of development economics based on the fundamentals concepts and the main critics against this economic field. He understand that the purpose of development economics is “to isolate the elemental forces at work in developing countries that raise per capita income, initially and then continuously, by exploiting fully the inter-industry and inter-sectoral network of economies of scale, externalities, and complementarities; it also analyzes the key factors that decide a fair distribution of the fruits of economic progress, and those which enhance human happiness more directly”. This definition seems to be aligned with the fundamentals of the economic science itself. However this economic field is criticized by many authors in terms of its protectionism, its potential of inefficiency of markets, its inward looking and its macro-oriented rather than micro-oriented approach. No other economic field has monopoly on the explanation of the development progress and on the application of strategies to increase the rate at which the countries develop. Four dimensions are identified on the field of development economics: 1. “Stylized facts or the «regularities» of the development process over time and across couantries”. Physical accumulation, industrialization, trade and human capital formation 2. Structural transformation which is the moving of resource from one type of economic activity to others that usually have a higher marginal productivity, capital accumulating capacity and added value. 3. Economic wide dimensions. it is related to the understanding of different perspectives on the development process. It analyzes the «dynamics» of the system related to structural transformation, trade, human capital formation, health, accumulation, literacy etc. 4. Experience of high-growth economies. It is based on the experienced of modern economies the way in which their macroeconomic stability and growth in GDP are related to distributive justice and a virtuous development circle. The paper gives some highlights about the rival neoclassical theories. The Harrod model which pays attention to population (labor) growth, savings rate and the capital/output ration as variables of growth. Solow-based models which add technological change into the variables and predict a no-growth equilibrium at the same technological conditions for every economy. The long-run growth then will depend on technological change exclusively while the technological process depend on the distance to the world’s technological frontier and exogenous innovation through R&D activities. On the other hand Endogenous Growth Theories (EGT) «engdogenizes» technological change as a function of the economic activities either as learning externalities or direct expenditure on R&D. EGT allows sustained growth through human ingenuity. (Naqvi) emphasizes that EGT cannot substitute development economics because of stringed constraints; and the lack of variables related to structural change and fair distribution (of the wider phenomenon of economic development).
  • 2. TRADE AND GROWTH Furthermore, the paper discusses the relationships between rate of growth, and some of the misconceptions about them. The role of trade (export expansion EXE) in growth or at least its superiority over protectionism (Import-substitution industrialization, ISI) seemed to be confirmed by the success of the High-performing Asian economies (HPAE). However the analysis does not take into account distribution fairness, not only within the country but also the deterioration and problems of trade are imposed on the welfare of the developing countries. Moreover the HPAE have also used efficient ISI, therefore the conclusion is that both ISI and EXE are needed to boost such development. An intelligent combination of the two approaches can lead to the best outcome as for the HPAE. Trade over protectionism under the excuse of higher export rates is not a decisive factor since [Even though protectionism may seem to lead to lower saving, less utilization of capacity, unemployment and worse income distribution by increasing internal costs and inefficient industrialization. ] trade has not be proven as completely superior because of ambiguity and subjectivity of their indicators. Furthermore, increased exports are strongly correlated to GDP growth nonetheless causality between these variables is not yet confirmed and is subject of discussion, e.g. EXE may not lead to LONG-RUN growth but otherwise. Additionally, world trade agreemments are usuallyunequal in distribution (more for developed countries –more productive countries) and the externalities generated (commonly over developing countries) are not compensated. E.g. the access of developing countries products into developed countries markets is limited and in this case trade certainly in the short and long-run benefits pioneers rather than late-runners. E.g. 2) reciprocity cannot be conducted by both parties since developing countries cannot sustained some of the conditions that reciprocity asks for and hence cannot make the most of the reciprocity offered by developed countries. E.g. 3) Negotiations are generally in the power of the powerfull, therefore reciprocity governs rather than free trade. E.g. 4) Some most liberalized countries did not experience real development. MARKET AND GOVERNMENT There are critics about possible socialism, though there have not been any perfect laissez-faire society… government always participates in certain degree. The fact is that the market would be perfect, were this world perfect as well. Therefore the government through adequate intervention can help the market avoid failure. E.g. if the technological change were exogenous, government intervention would hardly have impact. Government intervention is attacked because more welfare is lost due to government failure than with market failure. Even this remain to be proven, the fact is that there are not real tools to meet the perfect conditions the market requires to avoid failure, hence market failure is always unavoidable. Therefore the compensation of externalities can only be targeted by the government. In addition intergenerational concerns are difficult to be accounted for by the current market. Other counterpoint against market is that even though there is corruption in government (failure) in the market there is fraud that increases when the benefits are big enough to overpass the honesty limit. Finally, government should deal with the regulation of
  • 3. common property and goods and with R&D bottlenecks when most resources are devoted to this activity rather than to food for example. ETHICS AND DEVELOPMENT Development economics deals with ethical objectives named the sharing of gains and fair & equitable distribution of them. Therefore development analysis can never be reduced to self- interest of neoclassical economy. Unfortunately development does not work closely together with ethical issues (detached), i.e. ethical values are generally undermined by market economies. In this respect, development economics only supports self-interest in the sense of the invisible hand. However this neoclassical view is considered as a result of economic rationalism, which does not consider altruism and does not consider externalities (Pareto inequality). Redistribution is seen as a violation of individual rights and to fight this conception development economics need to defend redistribution in as much as possible a positivist way1. To do so, utilitarism, Rawls theory, Kantian moral can be a tool to avoid circumstance-base decisions. “development policy must aim to provide food and other primary goods needed by the least-privileged in the society; and issues such as the distribution of income and wealth should be relevant for development economics - even though the “equality of result implies a distribution process that is the antithesis of the market” (Coleman, 1989, p. 52)2“ CONCLUDING REMARKS  Neoclassicla does not talk about the growth promoting process of structural transformation.  Precipitated privatization is also costly, market solution is not always the best (it is not always proven as so)  Government intervention is also useful for market solutions  Market and non-market solutions should be seen as complements rather that substitutes or opposites.  Apply the concept of R&D spillovers and endogenous growth in development economics  ISI -» trade but with and efficient and speedy transition “The secret of success, as in the case of the East Asian countries, is to make a speedy and efficient transition from one strategy-to another in response to the changing conditions of the world demand, and to expand the tradeable sector by making it science-based rather than resource- based”.  Ethical rather than market-clearing oriented solutions  DE is not essentially positivist but normative and prescriptive “all issues which carry a clear altruistic ethical motivation and which do not admit of a simplistic market- 1 Positivism defend argument with rationalism rather tahn with subjetivity and intuition. 2 I could not get this article
  • 4. clearing prescription. The argument that the market-given freedom economizes on the use of scarce ethical resources (Arrow, 1972)3 is true to some extent; but the fact remains that altruism is not a scarce resource [I love it]; rather, it increases (decreases) with a more (less) frequent use (Hirschman, 1985, p. 362)4”.  “it should be neither irrational to act morally nor immoral to act rationally” ethical values reduces the cost of market intervention, market failure and government failure.  “The job of combining efficiency with justice and realism with compassion for the poor, the needy, and the downtrodden is difficult; but it must be done to change the world for the better.” NAQVI, S. N. H. 1996. The significance of development economics. World Development, 24, 975-987. 3 I could not get this article 4 I could not get this article