Econ171 Economic Development · Peter Bauer,(1915 - 2002) a developmental economist, best remembered for his opposition to the widely-held notion that the most effective manner to

Monday 1st August, 2011Meeting 25

Econ N171 Economic DevelopmentAtanu Dey

Paper “Subsistence, Trade and Exchange: Understanding Developing Economies.”◦ Peter Bauer,(1915 - 2002) a developmental

economist, best remembered for his opposition to the widely-held notion that the most effective manner to help developing countries advance is through state-controlled foreign aid.

The importance of internal trade (wholesale and retail) as an engine of growth

The current focus is on efficiency of the distributive services

Econ N171 Aug 1st '11 Atanu Dey 2

Distribution is link between production and consumption

Efficiency in distribution releases resources for other productive purposes

Even two centuries ago, the present day developed economies were largely exchange economies – production was not subsistence, unlike contemporary poor countries

Internal trade is an engine of growth – it created commercial institutions and increased human capital


Traders in emerging economies help growth of resources

Trading is not mentioned in the literature

But note that at one time, now developed countries were at the level of the currently developing countries

They went from subsistence to largely exchange economies

Services form a large part of the current developed economies


“International demonstration effect” –availability of Western goods discourage savings and investments, thereby inhibiting economic growth

But that is not so – the availability of incentive goods initiate and sustain a process of increases in investment and consumption

Evidence: regions with the most Western commercial contact are the most advanced


VCP is the contention that countries can be too poor to be able to save and invest their way out of poverty

Bauer argues that the vicious cycle of poverty is a myth◦ The rich countries today were poor once◦ We‟d be stuck in the stone ages if the VCP theory

was valid

VCP persists because it help those who advocate state intervention and foreign aid (govt to govt subsidies)


“To have money is the result of economic achievement, not its precondition”

“The world was not created in two parts, one with ready-made infrastructure and stock of capital and the other without such facilities.”


But the emphasis is usually on market imperfections

Traders who penetrate remote places are deplored for their monopoly power – but that they increase opportunities is neglected


Market-oriented and state-control economists agree that the transition from subsistence to wider distribution is important to escape poverty

Without increased markets, division of labor (scale economies) is not possible

Commercial links influence inflow of ideas

Mitigation of shocks is possible in economies which are integrated with wider outside world


No production without distribution

Production needs inputs and tools

Credit is intertwined with production – the costs and revenues occur in different periods

Traders are an effective and convenient source of credit

They bulk-break credit into smaller bits –thus integrating credit markets

Small-scale trading allows consumers to buy small amounts


Example: farmers improve their land outside the market processes

These investments are neglected in official statistics

These investments are significant in the transition from subsistence to exchange


Bauer criticized mainstream development economics◦ Neglect of internal trade

◦ The notion of the vicious cycle of poverty

◦ Nonmonetized investment leading to capital formation


TOWARDS A NEW PARADIGM FOR DEVELOPMENT– Dr. Joseph E. Stiglitz, October 1998◦ Prof. Stiglitz : (b. 1943) Columbia University. Nobel

Memorial Prize in Economic Sciences (2001) and the John Bates Clark Medal (1979). He is also the former Senior Vice President and Chief Economist of the World Bank. He is known for his critical view of the management of globalization, free-market economists (whom he calls "free market fundamentalists") and some international institutions like the International Monetary Fund and the World Bank.


Broader objectives of development than embodied in the consensus

It confuses means with ends: privatization and trade liberalization are means to the goal of sustainable and democratic growth

Too little attention paid to institutional infrastructure required for markets to function and for competition to work


The phrase coined by John Williamson in 1990 refers to “the lowest common denominator of policy advice being addressed by the Washington-based institutions to Latin American countries as of 1989.”

What is it?◦ http://www.cid.harvard.edu/cidtrade/issues/washington.html


Fiscal discipline A redirection of public expenditure priorities toward fields

offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure

Tax reform (to lower marginal rates and broaden the tax base)

Interest rate liberalization A competitive exchange rate Trade liberalization Liberalization of inflows of foreign direct investment Privatization Deregulation (to abolish barriers to entry and exit) Secure property rights


Corporate governance Anti-corruption Flexible labor markets WTO agreements Financial codes and standards “Prudent” capital-account opening Non-intermediate exchange rate regimes Independent central banks/inflation targeting Social safety nets Targeted poverty reduction


“… not only the Washington consensus but also earlier development paradigms failed: they viewed development too narrowly”

“Development represents a transformation of society, a movement from traditional relations, traditional ways of thinking, traditional ways of dealing with health and education, traditional methods of production, to more „modern‟ ways.”


Change is a means to an end

Change “associated with development provide individuals and societies with more control over their own destiny.”

Therefore, “a development strategy must be aimed at facilitating the transformation of society, in identifying the barriers to, as well as potential catalysts for, change.”


Sustainable development: a market-liberal vision

James A. Dorn*


Documents

Econ171 Economic Development · Peter Bauer,(1915 - 2002) a developmental economist, best remembered for his opposition to the widely-held notion that the most effective manner to