This is a review of two books published in the past 3 years, Morten Jerven’s Africa: Why Economists Get It Wrong (2015), Dani Rodrik’s Economics Rules (2017). Jerven focuses on Africa whereas Ridrik’s deals with “big” issues in economics, like its relation to other sciences and its role in society. I believe however that the issues both authors raise are of relevance to Africa (and development world in general) as well as to us, development practitioners and the “development community”.
Jervin’s is a rather pessimistic book. This is the bit from the book I like most (because of its cheekiness with which he parodies the customary paradigm of development economics): “…economists studying poverty and growth in Africa were path dependent and destined to fail. The econometricians suffered from different initial conditions and unsuitable factor endowments. Many were intellectually ‘landlocked with bad neighbors’. Reliant on econometric models and downloads from international databases, they suffered poor access to the ocean of real-world data. These poor initial conditions and unfortunate intellectual legacies explain in part why economists fail.”
This passage summarizes well the key points of Jerven’s critique in this book. One would certainly agree with his rather common sense caution that far-going conclusions about African economies based on available (unreliable) statistics should be treated carefully, that “history compression” (i.e. collapsing together different historical periods into the same analysis) and continental generalizations may be misleading, and that a historical approach to economic analysis may significantly improve our understanding of the drivers of African economic growth and development. But the relativist position that the book takes in discussing the substantive issues of growth and development in Africa is too much to my taste. I admit that a theoretical framework in economics is more a matter of creed than anything else but reading a book that explicitly avoids any theoretical stance on development is rather disappointing.
Disappointing as it is, Jervin’s book is a potent reminder to us, practitioners, that applying your critical facilities and taking all data with a grain of salt is absolutely vital for reaching valid conclusions, however theoretically biased and correlationally questionable they may appear. Jervin makes another important observation, of which we, practitioners, should be mindful: The best practice paradigm is a fallacy, not only because of the presence of informal institutions but also because the optimal design of institutions is not an absolute but changes in response to development levels.
Our UNCDF programs, particularly the so-called Global Thematic Initiatives (GTIs, such as MM4P and LFI) are based on the assumption of best practice postulating existence of some universal models that deliver superior results regardless of other conditions. This is a very strong assumption that could be wrong and needs to be questioned – and proven – each time we expand to a new country. I do believe that good practices exist and that there is a limit to relativism but I am equally convinced that the burden of proof of the good practice applicability in a particular context is with us.
In some sense, Rodrik’s Economics Rules is complementary to Jerven’s Africa. Although the former takes a much broader economics perspective, it sends a clear message that value-free judgments in economics are impossible and are necessarily ideology-driven. However, Rodrik establishes limits to Jerven’s bottomless relativism: valuable results can be obtained and casual relations may be established so long as the researcher realizes and recognizes that the ideological underpinning of his or her research provides just one of many possible interpretations of the research. The most infamous example of ideological blindness is the Washington Consensus, a series of neocon economic policy recommendations focusing on “stabilize, privatize, and liberalize.” This agenda was irrationally exuberant about the opportunities of unrestrained markets (which under certain assumptions do function well) and ignored the realities of imperfect markets in developing countries resulting in catastrophic economic outcomes in a number of countries subjected to the Washington Consensus regime, particularly in Latin America.
Hence, Rodrik’s insistence on economic models – constructs with clearly defined critical assumptions and constraints based on what one can call “middle range theories” as defined by Robert Merton (i.e., theories that are not too ambitious in their scope and not too far-going in their conclusions like Marxism, for example). Once those are spelt out, it is possible to make reasoned statements about the economic reality around us. Of course, the choice of the model will be influenced by ideological leanings but this is not an issue so long as that ideological leaning is reflected in the critical assumptions. The example that Rodrik uses is the choice of a perspective with respect to the roles of monetary and fiscal policy in a recession. Debates are essentially about whether recovery is hampered by the economy’s demand curve or supply curve. If you believe aggregate demand is repressed, you will generally be in favor of monetary and fiscal stimulus. If you think the problem is supply shock—because of excessive taxation, say, or policy uncertainty—your remedies will be quite different, and you will focus on a model that fits within the chosen approach.
Again, I believe this is a powerful reminder to us, practitioners, about the need to be mindful about the ideologies and approaches we – probably unconsciously – reflect in our program designs and programmatic interventions. To me, UNCDF has always been more Keynesian than Friedmanian and more socially oriented rather than free market oriented. Is it still the case? How does our choice of perspective is reflected in our program designs and is it reflected consistently? Even more importantly, is there consistency within the same programs? An eclectic mix of approaches may undermine and mutually cancel, rather than complement, a program’s interventions.
It is interesting to note that some of our programs demonstrate differing approaches, at least from the supply and demand point of view. MicroLead, for example, has a supply orientation, the assumption (in line with a simplified version of Harrod-Domar theory of economic growth) being that the GDP growth is determined jointly by the net national savings ratio and the national capital-output ratio. However, the story goes, developing countries have a low propensity to save and if this can be increased through a combination of organizational and business process measures (digitization, agent banking, etc.) coupled with education, the supply of capital will improve resulting in a faster GDP growth. Rostow and others defined back in the 60’s that the development takeoff stage requires saving rates from 15% to 20% to enable a self-sustaining growth. Implicitly, the MicroLead logic also incorporates the “big push” approach as well as a low level equilibrium trap (also known as a poverty trap) which argues that a certain minimum level of investment (i.e. capital supply) is required for breaking out of poverty and embarking on a sustained growth path. To what extent these theoretical constructs reflect today’s situation in developing countries is a question we might want to ponder about.
LFI, on the contrary, has a demand orientation. It postulates (as does the entire domestic resource mobilization agenda) that there is enough (or nearly enough) domestic capital to address national development challenges in developing countries but capital allocation is inefficient and not flowing to areas which would have maximum development impact resulting in an suboptimal equilibrium. The efficient flow of capital is constrained by lack of (qualified) demand, i.e. existence of bankable proposals. Once bankable project proposals are made available to the financiers, they will willingly redirect their investments to the hitherto neglected areas benefiting development and economic growth. The big assumptions behind this model (actually, Rodrik compares economic models to fables, each with its own moral) include, in addition to capital availability, also adequate excess liquidity and affordable cost of capital. Whether these assumptions hold in all situations and in all countries is a question to ask.
Rodrik makes another relevant observation concerning structural transformation. Structural transformation of LDCs features in our (UNCDF) corporate discourse as part of our commitment to helping least developed countries meet their graduation goals through inclusive pathways, and to supporting smooth transition following graduation. Structural transformation is seen as an enabler for achieving the graduation criteria. Rodrik however argues (not only in this book, there is another study that he co-authored in 2016, Structural Change, Fundamentals, and Growth) that structural change does not necessarily entail economic growth, and in some cases may even lead to slower growth.