DEVELOPMENT ECONOMICS DAY -1
Unit I Contemporary Development Issues Trends in Development Thinking (Prof. Dr. Sohan Kumar Karna) (Presented at M. Phil. Program, CEDECON, TU, Kathmandu on August 26, 2014) Society has to be transformed. Society free from past mistakes that brought down over economic, social, and political fabrics (structure). Three ideas in the world economy Private sector, the main foundation of economy and government' role to facilitate capitalistic model Government Sector, the main foundation of economy working through planning called state controlled model-socialistic model Government Sector plus Private sector, combined role called mixed model First model before 30s decade of depression- Britain, France, Germany, US, etc. Second model after 1917- USSR, EECs after second world war, PR China, Vietnam, N. Korea, Cuba etc in between 1949 to 1978. Third model- after second world war; welfare state is its ideal. Failure of first model proved after severe recession since 2007/08 Failure of second model proved to the downfall of USSR, eastern Europe, PR China and Vietnam Mixed model is being operated today everywhere in the world; leading countries like America, China have adopted this model; may be the role of private sector in US much more than China and the role of government sector may be much more than US.
We do agree with the employment existing in China but at the same time there is a Hume of billionaires in world rankings. Marxist and capitalists abuse each other but they do not bridge their holes in their principles.
Socialism does not mean poverty or slow development. The main function of socialism is to make free of productive forces, to develop, and to free from exploitation.
Equal distribution or minimum with aximum or maximum with minimum distribution of wealth and income does not mean socialism.
Socialism means to make all prosperous.
Despite the changing paradigms of the past crisis in UDCs not over. The most pressing issue today is how to end the crisis which has created social dislocations(stopping a system from working in a normal way) and human sufferings.
Settlement of a volatile (likely to change suddenly) political situation in the true spirit of democracy could become a sound basis toward a new development.
Chronology of Development Themes
1950-1960: Modernization, dual economy model, backward agriculture 1960-1970: Transformation approach, technology transfer, mechanization, agricultural extension, green revolution, rational peasants, farming system research 1970-1980: Redistribution with growth, basic needs, integrated rural development, state agricultural policy, state-led credit, urban bias, induced innovation, green revolution, rural growth linkages, farming system researchextension 1980-1990: Structural adjustment, free markets, getting prices right, retreat of the state, rise of NGOs, rapid rural appraisal, food security, rural development as process not product, women in development, poverty alleviation 1990-2000: Micro-credit, participatory rural appraisal, rural (social) safety nets, gender and development, environment and sustainability, poverty reduction, empowerment of rural poor 2000-Onwards: MDGs; sustainable livelihoods; good governance; decentralization; social protection and poverty reduction; social inclusion; economic security to avoid financial crises and recession; developing better mechanism to provide financial support to deal with the problems that gave rise to those problems. Thus eyes on: Privatization, Liberalization and Globalization the key mantras for ultimate transformation of the economy in the contemporary development sphere.
The New Development Paradigm (NDP) puts human purpose at the center as the driving force or source of power for development.
It dreams on all human values- social, political, aesthetic(beauty and art) and spiritual as well as the economic and scientific for success.
NDP outlines and approach to the transformation of society, and addresses all components of society.
Formal Arguments President Wolfensohn of WB A holistic approach that sharpens strategic vision as a new approach of development. Holistic approach: Good governance, transparency, regulatory and institutional fundamentals for workable market economy; policies that foster inclusioneducation for all, public services and infrastructures necessary for transportation and communication and ensure environmental and sustainability. From Growth Theory to Growth with Equity The evolution of approaches or theories in development from growth theory to growth with equity has already been practiced and recent dogma of focusing development is smooth functioning of market economy. Countries e.g. Nepal face dilemma - “stabilize growth” or guarantee “one- time accelerated growth” (in other words, “double-digit” growth or sustained growth by minimizing the chances of economic contraction. As development sustains, the level of inequality should be declined, but inequality in UDCs like Nepal is inelastic to either growth or underdevelopment. UDCs' overall growth track does not follow the established norms. Nepal's liberalization seems too liberal that does not care much to understand how surplus is created, where public investment goes, and developmental impact on the poor. Larger the number of working poor in wide informal economies, the greater is the percentage of exclusion. Excluded group is usually in minority who are less visible in taking a leadership role. This group is uneducated, unskilled, unemployed who are not the beneficiary of economic growth and therefore, possess limited assets
Scoping exercise to find out the dimensions and causes of exclusion needs to be addressed. Nepal’s policy for reducing inequality fails to make visible impact at the household level. Nepal has not been able to take proper advantages of the borders with India and China. Since over last one and half decades, key priorities and major policy prescriptions of the government remained less than satisfactory. The macroeconomic indicator reflects that Nepal suffers from a sluggish economic growth rate compressed to 4.3 percent from 1975 to 2011/12; 3.56 per cent in 2012/13 (due to low growth of agriculture by 1.1 percent and non agriculture by 4.6 percent) and to hit 5.2 percent in FY 2013/14 due to favorable monsoon, reform in investment climate and timely budget with inflation hovering around 9 per cent. The achievements in social sector and financial stability cannot be sustained in the absence of economic growth. Washington Consensus The name that economist John Williamson, a senior fellow at Institute for International Economics gave in 1989 a list of ten policy recommendations for countries willing to reform their economies, or practitioners of development with the dictum(statement on which people believe) of liberalization, stabilization and privatization; notably, financial and capital market liberalization. What makes a country prosperous, has always been fickle(changing). Decade 90s had no different in terms of the variety and volatility (sudden change) of the policy prescriptions that became dominant among academics, policy makers and the better informed segments of the world's population. The 90s, however, had different in one significant respect. During this decade, the world had been under the impression that there was a clear and robust (strong) consensus about what a poor country should do to become more prosperous. 
This impression clearly owes a lot to the surprising popularity of the term WC. The term WC (a gamut of policies) is broadly associated with
expanding the role of market forces and constraining the role of the state, sometimes also described as neo-liberalism. WC coined by Williamson to describe or relatively specified ten economic policy prescriptions that he considered to constitute a standard reform package promoted for crisis wracked (tortured) countries by Washington based institutions such as the WB, IMF, and US Treasury Department. List of ten policies prescription /recommendations 1. Fiscal policy discipline (macroeconomic stability indispensable precondition for growth, or reasonable price stability) 2.
Redirection of public policy (towards neglected field with high economic returns and the potential to improve income distribution, e.g. primary health, education and infrastructure)
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Tax reform (“pay as you earn� broadening the tax base and adopting moderate marginal tax rate)
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Financial liberalization (or market determined interest rates that are positive but moderate in real terms)
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Competitive exchange rates (to induce a rapid growth in nontraditional exports)
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Trade liberalization (liberalization of imports, with particular emphasis on elimination of quantitative trade restrictions-licensing, etc; any trade protection to be provided by low and relatively uniform tariffs; should be progressively reduced until a uniform low rates of 10 to 20 % is achieved)
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Liberalization of FDI(barriers impeding the entry of FDI be abolished)
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Privatization (state enterprise)
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Deregulation (abolition of regulations that impede the entry of new firms, or restrict competition, except of those justified on safety, environmental, consumer protection grounds and alike)
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Legal security for property rights (the legal system should provide secure property rights without excessive costs and make these available to the informal sectors)
The general ideas derived from WC had a huge influence on the economic reforms of many countries. The timing of the formulation of the WC in the late 1980s was fortunate and favorable coincided with the sudden collapse of the Soviet system. The disenchantment (unpleasant feeling) of socialist ideas and central planning which had pervaded many developing countries outside the Soviet Blog created and urgent widespread need for WC policy prescriptions and alterative set of ideas about how to organize economic and political life. But WC remained unchallenged only for a short time. The notion lost its edge when the economies of Thailand, Indonesia, South Korea, crashed and found a new culprit and new world was introduced into the vocabulary of reform forensics crony capitalism(dependence on private sector) highly distorted by the dominance of few large economic groups closed associated with those in government. Change in the international economic and political environment and new domestic realities in the reforming countries created problems. The Consensus did not encompass, thus forcing the search for new answers. Throughout the decade, the core of the consensus had experienced extraordinary mutations (a change in the form of structure) and shrinkage (the process of becoming smaller in size). Since the beginning WC had been greatly divided about the pace and sequence of the reforms. Profound differences quickly emerged about the need or desirability to be known as the application of shock therapy ,or alternatively, the big bang approach to policy reforms. This is not a debate just between experts in WC and others elsewhere, it also rages among insiders. That debate of course continuous today. Paul Krugman, James Tobin and Milton Friedman are against WC. According to them the problem is perhaps too much sand in the wheels of global finance.
WC is the target of sharp criticism by those who make their arguments on the ground that it is a way to open up less developed countries to investments from large multinational corporations and their wealthy owners in advanced. In 2006, several Latin American economies were led by socialist governments some of which opposed the WC. Critics cite the Argentine economic crisis of 1999-2002 as an exemplary case in point of why the WC policies were flawed(mistake). Argentina had previously implemented most of the WC policies as directed. Nobel Laureate Joseph E. Stiglitz needs to go beyond WC since there were broader objectives to development than were embodied in the consensus The set of policy recommendations upon which it is focused was certainly not sufficient for development because it took privatization and liberalization as an end in themselves rather than means to more sustainable, equitable and democratic growth. Early in the decade, Williamson acknowledged that not all of assertions (strongly achieve) he included in his original ten best policy recommendations enjoyed the same degree of consensus.
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According to his assessment at that time, in five of the ten policy prescriptions consensus called five I's (1. International economic stability- The reforming economies have to develop a set of institutions and policies; the commitment to strong and well supervised banking system; the establishment of a network of contingent international lines of credit and other such arrangements; exchange rate regime that diffuses(spread over) the impact of external shocks. 2. Investment- Without productive investment there is no economic growth and without it no economic policy is sustainable. 3. Inequality- In recent years, however, globalization, democracy and the information revolution have brought it to the centre of political debates. While poverty continues to be a focus of political attention, nowadays, poverty has to share with inequality. 4. Institution- Public sector institutions are the black hole of the economic reforms. In most countries, they absorb efforts and investment, their personnel practices distort labor markets, reduce countries’ overall productivity, impair international competitiveness are often at the center of the corruption.) had been established. Institutions should be accompanied by transparency and healthy competition. 5.
Ideology- Market shift- the global turn to markets- more people- friendly than it has been so far. Innovations are refinements respecting the need for macroeconomic balances and avoiding the over- dependency on the state may in fact accelerate development.) had been established. To conclude, the futures of economic reform takes any new consensus that may emerge will surely include these elements. WC was designed by way of policy reform addressed to problems of development. In the mid 90’s, the miracle economies of East Asia with their high saving rates and their robust macroeconomic equilibrium were commonly paraded(formal occasion) as an illustration of the success of WC. It became a model for the low-saving Latin American countries. It is to be noted that ideas derived from the WC had a huge influence on the economic reforms of many countries. Everywhere WC became just an only precondition for success. Beijing Consensus Associated with the state-led theory of economic development; emphasizes that there is no one right answer to: Forms of property rights Reliance on market prices Degree and timing of economic openness Critics charge that the “Beijing Consensus� ignores the extent to which the Chinese state has gradually introduced non-state (private and foreign) ownership, market prices, and freer trade albeit combined with an active state role in economic development. Joseph E. Stiglitz Approach "Towards a New Paradigm for Development: Strategies, Policies and Processes" According to him, development represents a transformation of society from "traditional production method" to "modern methods". A New Development Paradigm A better society with less poverty, better health and improved education.
Most of the previous paradigm have focused on GDP per capita. It was confused means with ends. Because higher GDP is not an end in itself but a means to improve living standards. For more than four decades, development was taken as mainly or matter of increasing the capital stock(either from abroad or through higher savings rates at home) and improving the resource allocation. Economists of the left and right differed. The former believed in the role of the government to improve resource allocation but later assumed government as a problem. Once government could step out the way, markets by themselves would lead to efficient resource allocation. Thus, observed development as technical problem requiring better planning, better trade, better pricing policies, better macroeconomic frameworks etc. But did not reach down into society, nor did they believe such a participatory approach was necessary. The laws o f economics considered universal and were taken key to the promotion of development. Applied to Africa and Asia as they did to Europe and America but did not bring miracle in these parts of the world. Lessons of History The previous approaches lack historic context and failed to recognize that successful development efforts in US and other countries had involved an active role for government Many societies before active government role failed to develop Capitalist economies before the era of government involvement were highly instable. The East Asian Miracle/ Crisis MiracleThe rapid growth of the East Asian countries revealed that Development possible if successful development should be accompanied by poverty reduction
Widespread improvements in living standard Even a process of democratization Crisis Countries that pursue good economic policies can suffer from the volatility of short term capital flows. But the benefits especially East Asia with high saving rates, remain unproven. Weak financial institutions is a source of macro instability as excessive government deficits. Financial market liberalization often under pressure from outsiders plays in contributing to the weakness in financial institutions. Excessively risky lending and inadequate financial sector supervision have resulted to the current crisis in bad loan. In Most Cases Government played an important role It intervened in trade, regulated financial markets, lowered interest rate and increasing profitability of banks and firms. Many of the policies were focused on areas that had been ignored in the past e.g. heavy emphasis on education, technology The most important lesson of East Asia succeeded in transforming their society at a greater speed with a holistic approach in mind. And no doubt transparency is an essential part of successful development as a transformation of society. Lack of transparency contributes to the crisis. •
It is time to recognize that human capital and natural capital are every bit as important as financial capital.
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It is time to invest in people.
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Clearly we must unite around a shared vision for the future―a vision for equitable human development, a healthy planet, an enduring economic dynamism.” (UN Secretary-General on the State of the World Economy and Finance at the UN headquarters on 17 May, 2012).
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New Development Paradigm based on ideas and writings of three Nobel Laureates-
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Armartya Sen Most attention to the ways and means of advancing real freedom for people: freedoms of choice, opportunity and personal capability Need for a more multifaceted approach to content and governance of development; wider concept of goals (over and above GNP per capita); development as widening choices and capabilities of stake holders; different aspects of freedom; public goods/social values; cultural /human rights; institutions matter are notably in his approach.
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Joseph Stiglitz (an American economist and a professor at Columbia University a recipient of the Nobel Memorial Prize in Economic Sciences and the John Bates Clark Medal) Development is primarily concerned with the economic and structural transformation of resources, capabilities and preferences of societies, and that of the mindsets, values and entrepreneurship of its individual and organizational stakeholders. Stiglitz believes that the NDP should be more holistic, more consensual, more socially inclusive, more open, and more participatory in its content than the ODP. Structural transformation of societies; holistic and dynamic approach; emphasis on ownership and participation; inclusive and consensus building; partnerships; social capital; accumulated learning and experience; the responsibilities of freedom are the notables ones.
Douglas Cecil North(an American economist known for his work in economic history and the co-recipient of the 1993 Nobel Memorial Prize in Economic Sciences): Pays the most attention to the role of incentive structure and enforcement systems in affecting the trajectory, structure and impact of economic development. Increasing importance of institutions; dynamic approach to change; incentive structures and enforcement mechanisms; values, perceptions of realities, and belief system; human/physical environment; reducing counter acting
uncertainty; extension of transaction costs to evaluating institutions; top- down and bottom- up institutions are notably in this regard. Source: •
Bagchi, A. K. and D'costa, A. P. (2012). Transformation and Development: The Political Economy of Transition in India and China. Oxford.
• Dunning JH 2006 Towards a new paradigm of development: implications for the determinants of international business, Transnational Corporations 15 (1):173-227.