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Seven Decades of Development Economics: A Review of Literature

Submitted by Asuncion M. Sebastian On August 8, 2012 For Anthropology of Development DVS 590P Under Dr. Levita Duhaylungsod


The Seven Decades of Development Economics: A Review of Literature This review traces the evolution of concept and definition of development economics, and the issues that emerged in this field after the Second World War in 1945 up to the turn of the twenty-first century. Evidently, some concerns have been consistently in the development agenda or part of its discourse, while others have changed or been redefined over time. The field of development economics started as practical activities in less developed countries (LDCs) without coherence of subject matter, accepted analytical apparatus, and wealth of empirical observations that characterize the older economic specialties, resembling the study of socialist economies or the study of economic history and consisted mainly of applying standard economic tools in the analysis of LDCs (Reynolds, 1969, p.401). For these reasons, development economics was logically categorized under economics. Despite the acknowledgement that multidisciplinarity could be a possible solution to what ails development theory (Taylor, 2008) and that interdisciplinary problem solving could prove more useful than honing theory and methodology (Bowden, 1971), still many of the works on development economics are from economics perspective, which is the limitation of this review.

I. The Emergence of Development Economics

A. Definition and Evolution of Concept
The birth of new nation-states in 1945 after the Second World War served as impetus to intellectuals to study the economic systems of the LDCs (Reynolds, 1969). Some people argued, however, that development economics started as early as the study of Britains process of industrialization between the seventeenth and the nineteenth century. Issues in this period revolved around protectionism for industrialization, capital accumulation in the dual traditional- modern economies, and the peasant economy model (Bardhan, 1993). The subject of development economics took off with literature centering on the development problems of southeastern Europe. There was a realization though that orthodox economics did not apply in such cases because the discipline assumed a condition characterized by pure competition, perfect information, neutrality of institutions, and sensitive adjustments to market dynamics (Bardhan, 1993; Peet & Hartwick, 2009). Unlike orthodox economics, development economics was concerned with the institutional places of custom, culture, and technology in resource allocation and peoples mindset, making constraints on individual behavior as significant as choices (Cameron, 2000, p.629).

During the 1950s and 1960s, economists proposed that to overcome underdevelopment, there has to be a big push or critical minimum effort that requires massive investment in a number of simultaneous projects as well as coordination of various industries, so that a country could break out from the vicious cycle of poverty and become self-sustaining (Reynolds, 1969; Lewis, 1984; Peet & Hartwick, 2009). The concept of economies of market coordination by Young (1928), Rosenstein-Rodan (1943), Nurkse (1953), Scitovsky (1954) and Fleming (1955)which argues that an economy has to coordinate its complementing industries to serve the demand inter-linkages to achieve growthwas born in this period but eventually lost its intellectual force in the succeeding decades. According to Krugman (1992 in Bardhan, 1993), the discourse was not sustained because at the policy level, the difficulties of aggregate coordination were underestimated and the incentive and organizational issues of micro-management of capital were underappreciated (p.134). Hirschman (1958, in Peet & Hartwick, 2009) opposed this big push theory, believing that poor countries lack the resources to make the necessary capital investment. Instead of addressing the obstacles to economic progess, he proposed that inducement mechanisms be applied so that people would be forced to invest. He was referring to entrepreneurship, or the ability to perceive opportunities and make investment decisions (Peet & Hartwick, 2009, p.71). This period also centered on resolving the problem of high and persistent unemployment and underemployment vis--vis positive wagethis led to the development of the efficiency-wage theory. Effects of technology on growth also became part of the discourse but gained attention only in the 1970s and 1980s with the recognition of externalities brought forth by the transfer, absorption, development, and adaptation of innovation particularly in the catching-up developing countries (Bardhan, 1993). Two decades later, the economists realized that the growth consensus did not work and that no single theory could possibly explain and solve the problems of all the LDCs, termed developing countries at this time. The trend then became the identification and analysis of sub-groups of LDCs (Killick, 1980). Although economics provided some theoretical framework in the analysis, Reynolds (1969) recognized the institutional and behavioral differences between the LDCs and the richer nations, which were traditionally the center of the discipline. He argued that peasant households that characterized the emerging nation-states do not behave like the mid-western farm households and that the growth pattern of industrialized economies was different from that of
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the poor countries. Quoting Keynes, Reynolds further asserted, Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine.(Reynolds, 1969, p.403). With this premise, Reynolds suggested four things to advance development studies: 1) construction of growth models adapted to the LDCs, as no one growth model could possible explain all kinds of LDCs; 2) empirical analysis of early economic growth in particular countries; 3) comparative cross-sectional studies; and 4) microanalysis of economic behavior. Eventually, development economics became the application of economic principles and methods to conditions in the LDCs and was considered another specialism alongside agricultural economics or international trade (Killick, 1980). Its description later evolved into the process of improving quality of all human lives (Todaro 1989: 620 in Smiley, 1995) to the investigation of the causes of poverty and low incomes around the world and (which) seeks to make progress in designing policies that could help individuals, regions, and countries to achieve greater economic prosperity (Acemoglu, 2010). Given Acemoglus background and bias, however, development economics in his term has remained in the traditional economic discipline despite several authors assertion of multiple facets and levels of development. The author also maintained that in development economics where agenda ought to be broad, we should not lose sight of the bigger picture of the problem of economic development (Acemoglu, 2010, p.50), again, despite the other authors focus on context and localization of economic principles. Mono-economicsthe position that all economies work in similar ways and that neoclassical economics was universally applicable (Peet & Hartwick, 2009, p.68)is still held true today by some economists, only that now they acknowledge that price-setting is more difficult in the LDCs. On the other hand, development economists no longer reject the principle of neoclassical economics but propose that other problems such as income distribution, unemployment, and poverty, among others, be included in the model (Peet & Hartwick, 2009).

B. Beyond Economics: Multidisciplinarity of Development Economics

Resnick (1975) introduced an anthropologic view of development based on Marxian philosophy that value is based on relations of production determined historically and it is these relations that determine and govern those of exchange (p.319). According to Resnick, the effect of dependency theory on people, specifically those in hinterland is this: their needs and tastes become divorce from their own history and social development and are made functions of the centers economic growth and political power. In this sense, the role of political science is brought into the picture. In fact, Resnick pointed out that even
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if economic models are independent of government policies, they would inevitably come in conflict with the reality of political relations (Resnick, 1975). Similarly, Killick (1980) pointed out that in the dependency of nations, economic penetration spills over into influence over culture, social organization, education, and politics. In consequence, policies and development plans are influenced and even determined by foreign private interests and governments (Harris, 1975 in Killick, 1980). Thus, the fields of anthropology and social psychology, in addition to political science mentioned earlier, come into the analysis of development economics. Lewis (1984) furthered that market mechanisms sometimes do not hold in poor countries, where people do what they do for non-economic reasons and not to maximize their income. In some countries, he said, production and exchange are governed by ritual laws, based on kinship and on authority status(and) to demonstrate their superior achievement (people do) deliberate destruction of productive assets (p.3). Costs and benefits also differ across ethnic classification. For these reasons, Lewis emphasized the role of economic anthropology in development, especially that the behavior relating to investment, savings, risks, and having children is not governed by the calculus of marginal utility (p.4). Economic theory, econometric methods, sociology, anthropology, political science, and demographyall these subjects have eventually merged into the field of development economics (Ray, What's New in Development Economics?, 2000).

II. Issues in Development Economics

A. Measures of Development
In the 1940s, development was defined according to the countries industrialization and thus its measure then was economic growth, production, and productivity (Nederveen Pieterse, 2010, pp.6-7). At this time, human beings were treated as means of production (Sen, 1999, pp.292-296), alongside capital and land. However, since the emerging nation-states after the war were predominantly agriculture-based and hence, labor was the largest input, Reynolds (1969) asserted that employment and output (in todays term, the gross national product) were the test of successful development. Bowden (1971), on the other hand, argued that such measure creates biased for labor- intensive projects whose pay-off may only be good in the short-run (p.116).
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1. Economic output

Adelman (1975) countered that concentrating on growth assumes that other goals such as equity and welfare follow, that is, they are positively correlated. History shows, however, that there is no automatic trickle-down of benefits and, worse, development typically leads to trickle-up, benefitting the middle class and the rich (p.302). The trickle-down assumption, the author said, was based on the modern industrial nation model which led the LDCs to use performance criteria, strategies, models, and methodologies inappropriate to their context. Adelman thus proposed a development model whose goals are 1) to provide material basis to achieve realization of human potential and 2) to establish the economic conditions for relaxing the other barriers to self-realization such as access to education, work satisfaction, status, security, self-expression, and power (p.306). This model focuses on individuals and includes removal of social, political, and spiritual forms of deprivation as well (Adelman, 1975). It can be operationalized through this strategy: redistribute assets and educate people first, then grow later. This strategy was employed by the four successful equitable-growth countries in the 1950s, namely Israel, South Korea, Singapore, and Taiwan (Adelman, 1975). There is yet another argument why production, usually measured by gross national income and similar economic terms, cannot be an accurate gauge of development. Building on Beckers (1965) notion of household production, Parente, Rogerson, and Wright (2000) established a growth model that showed cross-country differences in income are due to differences in both capital and market hours and that individuals in poor countries spend less time working in the market. Given this condition, there is little correlation between published participation rates of rural folks and their income per capita. Another insight was provided by Mueller (1984) and Kirkpatrick (1978): while individuals devote much time working, relatively small fraction of it is devoted to activities that generate output that is measured in gross national product accounts (Parente, Rogerson, & Wright, 2000, p.685). Thus, the authors argued that home production should be made part of the income accounting. On the issue of equitable distribution of benefits, Resnick, seemingly referring to the dependency theory, explained that the economies in the hinterland and the LDCs that are characterized by poverty have been systematically organized by the center or the affluent countries. Therefore, unequal distribution of income is an essential and endogenous part of capitalist development (Resnick, 1975, p.317). As reaction to this dependency theory, Killick (1980) supported Todaros work on freeing individuals and nations from servitude and dependence (p.370). He explained that dependency takes place when the following happen: 1) heavy
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2. Equitable distribution

influx of foreign capital into a peripheral nation; 2) lop-sided export structure favoring the central nation; 3) unequal position in trade, investment, and taxation; 4) inappropriate technologies exported to the periphery; and 5) consumption patterns in the periphery are set by the central nation. With the constant widening of income inequalities, Killick (1980) wrote that development should also consider the following: social justice, human satisfaction, and, quoting Michael Todaro, basic human needs, jobs creation and employment, education, cultural and humanistic values, expansion of social choices, which all lead to individual and national self-esteem (p.370). He observed, too, that development in the 1950s and 1960s focused on the problem of inequality between nation-states, not on conditions within a nation-state. While the national self-esteem concept seems to have been lost over time, the individual focus of development persists through the 1990s. The poor became the center of development that asserts priority attention should be given to satisfying the basic needs of people for food, water, and shelter rather than to simple growth-maximization, andthe environment to sustain such growth (Friedmann, 1992, p.2). It further argues that economic growth does not necessarily mean higher income for everyone; in fact, it leads to the exclusion of some sectors and adds still to the poverty of others (Friedmann, 1992, pp.17-21). Later, this assertion became the foundation of what was later called Alternative Development. 3. Human development Considering the changes in development thrusts over the past decades, human development-focused measures cannot be wholly attributed to Amartya Sen, as done by some development scholars today. Sens human capacitation and enlargement of peoples choices of human development (Nederveen Pieterse, 2010, pp.6-7) has been a subject of debates since the 1970s. Sen (1999), enriching the earlier human-focused concept, argues that freedom is the means and ends of developmentthe individual capacity to do thingsand refers to it as that which is concerned with the process of decision making as well as opportunities to achieve valued outcomes (p.291). Sens freedom therefore could very well mean Killicks interpretation of Todaros freedom from servitude and dependence. Decades before the happiness index was considered an alternative way of measuring well-being and thus, of development, Sen (1984 in Bardhan, 1993) had already put forward his argument to this idea: Judging importance by the mental metric of happiness or desire-fulfillment can take a deeply biased form due to the fact that mental reactions often reflect defeatist compromises with
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harsh reality induced by hopelessness grievance and discontent are submerged in cheerful endurance by the necessity of uneventful survival (p.138). Ray (2000, 2007) argued that despite all the indicators or variables identified over the yearsbad nutrition, high mortality rate, lack of access to sanitation, safe water and housing, to name a fewnobody has come up yet with the definition of development or underdevelopment and that these concepts are merely correlated with the variables. No causal relationship has been established; just as these variables may cause underdevelopment, underdeveloped could also cause the occurrence of these variables.

B. Causes of Underdevelopment
While the solutions for underdevelopment have been thought about since the 1940s, the analysis as to what causes it has not been brought to fore until a decade or so later. The development economics that emerged in the 1950s attributed underdevelopment to traditionality, that is, individuals mindlessly following traditions in resource allocation, as opposed to modernization, whereby such matter is decided by market forces and/or the developmental state. The argument therefore of the early development economics was that the state had the leading role in overruling those civil society institutions that carried values inimical to market forces and individual enterprises (Cameron, 2000, p.629). Another possible cause is Rosentein-Rodan (1943) and Hirschmans (1958) role of expectations and self-fulfilling prophecy. Both concepts, related to the discussion of multiple equilibria, work on the basis of peoples speculation and social pressure, meaning doing what everybody else does. If an investor thinks that demand would be high, then he would be willing to invest money; if all investors share the same optimism, then all of them would invest in the market and thus demand would indeed be high. The reverse, the case of pessimism, is also true (Ray, What's New in Development Economics?, 2000). History or initial condition is another possible cause of underdevelopment (Bardhan, 1993). A nation, despite its similarities with other nations technological capacity for example, could end up at a level of development different from the others because of its history or initial conditions. Initial conditions include but are not limited to inherited capital stock, legal structure, traditions, inequalities in the distribution of asset ownership, colonial heritage, institutional settings and political institutions, and character of early industry and agriculture (Ray, What's New in Development Economics?, 2000; Ray, Development Economics, 2007).
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Sokoloff and Engermann (2000) explained the impact of initial conditions on future development of a nation thus: the early institutions of colonial rule were designed precisely for the purpose of resource extraction and the resulting inequalities had effects on the subsequent development of the colonized nations. In nations where such extractive agreements did not exist, one could expect comparative equality and path of development that is more broad-based (Ray, Development Economics, 2007, p.10). Further, in societies that started with inequalities, the elites were able to set up institutions that would protect their positions thereby sustaining inequality over time. In contrast, such effort of the elite groups in societies with greater equality was relatively unsuccessful (Ray, Development Economics, 2007). The eventual rise of the convergence theorywhich supposes that after controlling savings rate, population, and political climate or corruption, poorer countries will tend to grow faster and hence, catch up with the others and convergeled to another research query: why have other countries fail to converge? Often, peoples intrinsic difference in their willingness to save or to procreate, or some other social, cultural, and political factors are used to explain a countrys failure to converge. However, whether corruption, high population growth, and/or low savings rate is a cause or an effect of poverty is not established. In short, there may be correlation between the variables but the direction of causation is not clear. The result therefore is superficial, if not flawed policy interventions (Ray, What's New in Development Economics?, 2000).

C. The Theory-Practice Gap

The 1950s and the 1960s were considered a period of great theoretical innovation and controversy what with new models invented by development economists during this time: unbalanced growth, Dutch disease, structural inflation, dependency, appropriate technology, big push, among others (Lewis, 1984). However, theory is often described as the precise definition and investigation of interrelationships under model condition(while) practice can mean the design and execution of policies, plans, and actions to alter economic ciscumstances (Bowden, 1971, p.113). Thus, tension seems to exist between curiosity and compassion, understanding and manipulation, precision and relevance (p.120). Even until today, the theory-practice gap still exists. Common thinking is that economics as science provides principles that are used as guide in policy choice, while economics as practice is the exercise of flexibility in employing second-best solutions that better fit the real-world conditions (Taylor, 2008).

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Reynolds (1969) criticized the existing theories for not tackling non-economic variables that were equally influential in the growth of the LDCs, referring to the territories of political science and social anthropology, among others (p.404; also in Myrdal 1963, p.151 in Peet & Hartwick, 2009). Bowden (1971) supported this argument, saying that if the theorist or analyst deals only with quantifiable variables he will fail to consider concepts which may in fact determine the economic future. It is so easy to be precise and sure when relevancy is sacrificed (p.115). Clearly, even in the earlier days, development had been recognized not merely as a sub-theme of economics but a multidisciplinary field on its own. The 1980s was marked by the emergence of new theories. No-growth or stagnation theory had grown out of fashion and was replaced instead by theories on the growth of resources of nations, which lead to the query as to why some move faster than the others. The alternative strategy of development, which addresses basic needs and supports expenditures on social services and investments in human capital also emerged. Entrepreneurship and its related issues became a trend: higher propensity of certain ethnic groups to be entrepreneurial than the others and the resented foreign entrepreneurship by the locals despite the benefits they derive from their presence, for example. The role of leadership was likewise emphasized in this period as a factor contributing to sustained growth (Lewis, 1984). By the first decade of the 21st century, Taylor (2008) divided the development economists into two: those who want to totally destroy the past development theories and those who seek to remodel them. Among the first group were Erik S. Reinert and Ha-Joon Chang. Reinert criticized the existing development economics theories for two things: 1) over emphasis on the mathematics in their attempt to become hard science and thereby overlooking in the process the link between economies and societies and the practical policies; and 2) their discard for qualitative, case-study-oriented research and so they failed to account for the differences across nations such as knowledge base, entrepreneurship (which has been part of the discourse since the 1980s), and capabilities. Likewise, there are still staunch supporter of economics as a science. They hold economics crucial role in development not only because it helpsfocus on the most important economic mechanisms but also because it provides guidance on the external validity of economteric measureshow specific empirical exercises about the effects of shocks and policies in different circumstances and when implemented on different scales (Acemoglu, 2010, p.17). Despite this claim, Acemoglu recognized that relationship of variables cannot simply be derived from an economic model unless relevant constraints are incorporated in it. He also noted that policies are made often not on the basis of economic principles
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but on the political elites self-serving interestsan issue raised by the likes of Killick in as early as 1980s.

D. On State, Market, and Growth

From 1950 to 1980, the state as a sovereign institution for development and public policy as tool for transformation of economies was central in development economics (Cameron, 2000; Peet & Hartwick, 2009). Bowden (1971) argued that natural market forces are not enough and that there has to be a deliberate, vigorous, purposeful action to attain definite goalsa planned and purposeful departure from the passive acceptance of the outcome of the workings of imperfect market. (p.117). Adelman also argued that the poorest segments of the population typically benefit from economic growth only when the government plays an important economic role and when wide-spread efforts are made to improve the human resource base (Adelman-Morris, p.181 in Adelman, 1975). In contrast to the state-focused arguments, Resnick (1975) asserted that the state, through its financial and fiscal instruments, has produced market imperfections that frustrate the development of free markets (p.318). Thus, the likes of Resnick advocated neoclassical theorys perfect competition, allowing the market forces to determine the optimal supply and demand in all sectors in the economy (Resnick, 1975). However, Lewis (1984) argued the reverse is true in the case of LDCs: because the market works less efficiently in the developing economy, the government constantly rectifies market error or inequity. Still, Lewis admitted that such assumption does not apply to all LDCs and that there are cases when keeping the imperfect market is better than applying government solutions. On the other hand, Killick (1980) argued that the neo-classical concept that stresses efficacy of product and factor markets in the allocation of resources (p.375) has broken down but has nevertheless resurfaced with the application, this time, in human capital theory. Investment in education, for example, must result in returns comparable with, if not higher than other investments. Income differential also results in migration because individuals are utility maximizers, as in the phenomenon of rural-urban migration. People in the rural areas migrate to urban following an assessment of net present value of long-term, higher, but uncertain, urban income streams versus the lower but known, rural income streams plus a (possibly) non-recurring cost of migration (Smiley, 1995, p.496). Reinert also challenged the magic of the (free) market and argued that even the ostensible free-market successes such as Ireland, Chile, and Finland, also
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benefited from restricted capital flows, state-run industrialization initiatives, and nascent industry protection (Taylor, 2008, p.545). He also observed that trade could be good only if the trading countries are in equal footing and that poor nations should be allowed to protect their domestic industries because open- market policies only destroy the most advanced industries in the LDCs (Taylor, 2008). These arguments are the very same things advanced by the likes of Killick in the 1980s in response to dependency theory. In the end, however, Taylor (2008) concluded that sometimes market fails not because of the policies imposed from abroad but because of the decisions made by the interest groups, politicians, and bureaucrats in the domestic front. The author could be referring to Kruegers concept of political failure (to be discussed in the next section on Institutions). Recent literature highlights the role of entrepreneurship in development. Baumol et. al., for example, emphasized the importance of entrepreneurship in economic growth and poverty reduction and suggested a typology of capitalism: 1) big firms; 2) state-directed; 3) oligarchic; and 4) entrepreneurial. The problem, according to Baumol et. al., is that conventional economic theory does not include innovation into models and accounts only for inputs and and total factor productivity. They argued further that a mix of entrepreneurial and big- firm capitalism is more likely to lead to growth in that the entrepreneurs innovations could be refined, produced, and marketed by the large players in order to create a successful entrepreneurial economy (Taylor, 2008, p.548).

E. Institutional and Behavioral Differences across Countries

As presented earlier, Reynolds (1969) recognized the institutional and behavioral differences between the LDCs and the richer nations. He observed that institutional and behavioral peculiarities of the LDCs require a significant amount of new tool construction (p.402). He cited as an example the system of land ownership and the division of output between owner and cultivator(having) impact on labor input, choice of products and techniques, and receptiveness to technical change (p.407). The same issues on behaviorial and structural differences between the rich countries and the LDCs were brought up by Lewis (1984) in his query whether a separate economic discipline should be established for the LDCs. For example, prices in the LDCs do not reflect the real social costs embedded in externalities, learning factors, inappropriate exchange and interests rates, and disguised unemployment. Unregulated markets in LDCs lead to center-periphery formation within a country and market forces in LDCs often fail because of low demand and supply inelasticities.
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1. On Institutions Lewis (1984) posed the questions as to how institutions influence decisions, how they use incentives, and how they have changed over time. Self-reinforcing mechanisms of sub-optimal institutions, for example, block economic progress. Akerlof (1984 in Bardhan, 1993) used the Indian caste system to illustrate how economically unprofitable or socially unpleasant customs may persist when each individual conforms out of fear of loss of reputation from disobedience (p.136). Smiley (1995) also argued that problem of poverty and inequality in the agrarian, labor-intensive LDCs could not be solved unless the institution of landholding, which is concentrated heavily on the few, is changed. Patterns in the LDCs showed that landlords take 50 percent to 80 percent of the crops while money lenders, who are often also the landlords, charge interest at 50 percent to 200 percent. The peasants thus evolve from small proprietor, to tenant, to sharecropper, to landless laborer, to jobless vagrant, and finally to migrant slum dweller (p.492). Some economists therefore attributed the success of the East Asian tiger economies to their land reform programs, by which the power of landed elites was broken (Rock 1993 in Smiley, 1995), refuting the earier claims of neoclassical economists that this success was due to simple free market mechanisms (Cameron, 2000). Hence, the 1990s witnessed the rise of New Institutional Economics (NIE), which concern capital, property rights, and institutions. While neoclassical economists assume that individuals make decisions based on rational choice or utility-maximization thinking, institutional economists argue that factors such as culture of poverty, moral economy, and social formations influence the decision making of peoplean influence of socioeconomics and anthropology on development economics. NIE suggests that institutions have considerable durability and path-dependence and recognizes non-government organizations (NGOs) as having unique position in transforming society, as they negotiate with the two competing dominant institutional modelsthe market and the state. Under the NIE, the NGOs also play an important role in the creation and capacity building of grassroots institutions that better represent their target groups of vulnerable people (Cameron, 2000, p.633). Later, institutionalism was considered passe in that the incentives the institutions provide were given more importance than the form that they assumed (Taylor, 2008). In fact, Rodrick argued that principles should be institution-free, that is, without a single institutional framework that can or should be applied universally (Rodrik, p. 29 in Taylor, 2008).

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2. On Behavior Development economists also looked into the individual behavior in the face of economic change. Duflo (2006 in Ray, Development Economics, 2007, p.6) hypothesized that being poor almost certainly affects the way people think and decide. Different sources of income, for example, are treated differently by the household members, depending on how it affects ones position in the intrahousehold power game. Another hypothesis has been formed: underdevelopment leads to conflict, in contrast to the more popular thinking that conflict leads to underdevelopment. The causal link is thuspoverty reduces opportunity cost of engaging in conflict. Grabbing resources, for example, is quicker and more profitable for the poor than the steady process of wealth accummulation (Ray, Development Economics, 2007, p.17). Ray (2010) also argued that uneven growth can both raise our ambitions and unleash our frustrations (p57). Exposures to higher living standards may affect ones rate of savings, decision to migrate, fertility choices, technology adoption, and work ethic, among othersthings that are often excluded in the economic models. It is unclear, however, whether such exposure would lead an individual to greater motivation to be economically productive or to despair and frustration. The author thus recommends the inclusion of the following in research agenda of development economics: 1) social determinants of behavior such as aspirations, separating effect of information from the effect of hope and desire; 2) inequality tolerance and evolution; and 3) study redistributive policy with behavioralism in mind from a positive political-economy perspective. 3. On Institution-Individual Behavior Dynamics Institutions can also shape individual behavior, just as individuals can influence institutions. Take the financial system and the poor as a case in point. The formal credit sector excludes the poor not because they are less trustworthy but because in case of project failure, they do not have the resources to repay their debts. The poor are thus compelled to turn to informal lenderstheir landlords or traders most oftena situation that may create pockets of exploitative local monopoly (Ray, Development Economics, 2007, p.15). Similarly, legal institutions supporting contract enforcement and property rights, and protecting investments and credits affect corruption, stock-market participation, corporate valuation, government interventionism, and judicial efficiency (Ray, Development Economics, 2007, p.19). Krueger (2009) differentiated government failureinefficient public sector enterprises, regulations, and control of private sector activities, inadequate physical infrastructure, and failure to deliver basic servicesfrom political failure, under which politicians act according to their self-interest and pursue
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client-patronage relations, and in Rays (2007, p.11) term crippling of political opposition, much to the detriment of society in general. Such condition, according to Krueger, calls for reform by the leaders, which is deemed absolute essential in low-income countries if they are to achieve satisfactory rates of economic growth (Krueger, 2009, pp.280-281). Ray (2010), however, defended that bad decisions happen not necessarily because of the politicians self-interests. The author argued that allocation of public resources primarily lies in the debate, discourse, and lobbying, which in turn, depends on the power of media, the lobbyists, and the politicians. Due to this external force, even honest politicians could make bad resource-allocation decisions and thus corruption among policy makers may not (necessarily) make things worse in this case (Ray, 2010, p.53). Further, the author explained that interests of some groups become entrenched not so much due to corruption as it is due to lack of information of government (Ray, Uneven Growth: A Framework for Research in Development Economics, 2010). The problem is, in reforming the entrenched interests of certain groups, the losers or potential losers will defend the old system and impede progress, as they control institutions. To prevent their foreseen lot, these losers will block redistributions that spread growth to other sectors to secure their position (Ray, Uneven Growth: A Framework for Research in Development Economics, 2010). As explained by Evans (2004), the power wielders who are bound to lose their base under a new setup will resist change. People whose power will diminish as a result of the institutional change will likely not support the change even if the result will be beneficial in absolute terms, and thus, Evans concluded that bad institutions would be hard to reform (pp.38-39). Grindle (2004) recognized the same problem, saying that the governments may be trapped by the political elites and that this concern may be addressed by innovative ways such as the participation of civil society (p.539). This argument was also supported by March and Olsen (1989) who contended that political institutions dealing with the questions of preferences and endowments cannot treat these issues as they do in economics. They added that Pareto-optimal solutions will not be an adequate basis for choice, especially in cases where powers and rights can be converted into resources, even monetary resources at times (p.364)another proof that development economics cannot be separated from political science as well as from institutional economics.

F. Indigenization of Development Economics

Given the institutional and behavioral differences between the LDCs and the richer nations, as well as inapplicability of orthodox economics principles on

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the context of the LDCs, Bowden (1971) proposed the need to develop applications of theory and methods in the local areas (p.117). The group of those who intend to remodel development theories such as Baumol,, Rodrik, and Collier, argued that local knowledge and needs should be taken into account and that the problems of the poorest are remarkably different from the rest of the world. Rodrik reasoned that Washington Consensus failed because it did not consider the local-level barriers to growth such as high cost of financing, low return on financial and social investments, and low private appropriability (Rodrik, p. 89 in Taylor, 2008, p.550). Development literature also points out the advantages of local, informal, sometimes non-market lending over the large, formal credit system, as illustrated by the case of traditional rotating credit associations and group loans in poor countries. This credit system works largely because of peer monitoring, which as Arnott and Stiglitz (1991) argued, can be an important control mechanism for moral hazards (Bardhan, 1993).

III. Criticisms of Development Economics

There had been constant criticisms of development economics from the perspective of conventional economics that undermined its scientific validity, which had eventually led to its temporary demise in the 1980s (Peet & Hartwick, 2009, p.74). According to Bauer (1972, in Peet & Hartwick, 2009, p.75), development economics was not merely wrongit was intellectually corrupt, as its views contradicted the obvious empirical evidence. Among the principles of development economics that stand in conflict with the evidence include the thesis of vicious circle of poverty, the allegation that rich countries have caused the poverty of the poor countriesand the insistence on the necessity of foreign aid for the material advancement of poor countries(1972, in Peet & Hartwick, 2009, p.75). He maintained that poverty reduction in the LDCs required neither large-scale capital formation nor investment in human capital; he also warned against governmental participation in the economy (Peet & Hartwick, 2009). However, Bauer did not offer any proposal as to how the problem of underdevelopment can be addressed. For Johnson (1971), development economics weakness was in adopting industrialization and national self-sufficiency as its main objectivesimilar to Adelmans argument earlierwhich only led to unproductive investments, corruption, favored import substitution, and misguided state intervention in the LDCs. In short, the problem of LDCs stemmed neither from colonial history of a
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country nor from global inequalities, but from misguided Keynesian development policies (Peet & Hartwick, 2009, p.75). Lal (1980, 1983 in Peet & Hartwick, 2009) also argued that because development economists treated the LDCs as special cases rather than merely further examples of rational beings, they distorted the standard economic principle of price-efficient and free-trade mechanisms. The author was against all forms of economic control and government interventions, and the redistribution of income from rich to the poor. For him, in a necessarily imperfect world, imperfect market mechanisms do better in practice than imperfect state planning mechanisms (p.76). By the mid-1980s the whole notion of development economics had been discredited in the conventional circles, which coincided with the revival of liberal, laissez faire economics under the banner neoliberalism. Overall, however, this review supports the observations made by Bardhan (1993): 1) that recent theorists are oblivious of the pre-existing and quite rich development literature that they tend to reiterate issues, which have already been in the discourse a few decades earlier; and 2) just as development economics have benefitted from the concepts and tools in other fields, so has development economics contributed to their literaturethe study of rent- seeking, commodity price stabilization, and dual economy models, for example.

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Works Cited

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Ray, D. (2010). Uneven Growth: A Framework for Research in Development Economics. The Journal of Economic Perspectives , 24 (3), 45-60. Ray, D. (2000 January). What's New in Development Economics? New York, New York, USA. Resnick, S. A. (1975). State of Development Economics. The American Economic Review , 65 (2), 317-322. Reynolds, L. G. (1969). The Content of Development Economics. The American Economic Review , 59 (2), 401-408. Sen, A. (1999). Development as Freedom. New York, USA: Anchor Books. Smiley, D. H. (1995). Can Labor-Capital Models Predict the Response of Agrarian Societies to Development? Part I: Problems with Development Economics. American Journal of Economics and Sociology , 54 (4), 489-501. Taylor, M. M. (2008). Development Economics in the Wake of the Washington Consensus: From Smith to Smithereens? International Political Science Review , 29 (5), 543-556.

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