Feb 5, 2009

Enough with development economics

Economists who study the process of economic development (or mostly lack thereof) should study politics instead.

At the micro level, they study which design works in foreign aided project. This is not realistic. Foreign aid didn’t work because of gangsters in power, not because the projects were badly designed. For projects to be replicated and sustainable they need to be adopted on a bigger scale and there political gangsters will ruin everything again.

At the macro level, some show that countries do not have the correct trade policy, the correct exchange rate policy, the right monetary and fiscal policies, the right amount of education spending, not the right institutional framework etc…that all countries that managed to grow had good institutions and the right policies…No shit! And then some other economists reply that this is not true as some countries adopted the right policies and it didn’t work and hence policies should be country specific. No shit!

When it comes to poor countries, all of these bad policies reflect only one thing, gangsters in power. Adding this omitted variable in all growth regression would possibly make all the policy and institutional variables insignificant.

Therefore, development economists should focus on how to establish a good government. A good government will adopt the right country specific policies and most foreign aided projects will work, even when compared to the strictest counterfactuals! 

By the way, here is required reading for those interested in development economics, from Angus Deaton. who prefers development experimentation towards the evaluation of theoretical mechanisms instaed of towards the evaluation of projects. 

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