Lee-Roy Chetty
Lee-Roy Chetty

Rethinking economic development

The challenges faced by nation states in the 21st century vary greatly in terms of economic development.

Specifically within a development economics context, a paucity of useful and successful policy guidance is prevalent. As a result, more often than not, broad policy prescriptions have been formulated to attempt to address the economic problems of developing world countries as one homogenous grouping.

With this standardised approach to development, often these prescriptions have tended to use advanced, developed world countries as a reference point or best practice case study for solving developing world economic challenges.

As a consequence of this approach, a plethora of economic theory and thought has either focused on isolating developing world countries from perceived inequity within the global economic system or more nefariously, blindly imitating and opening their economies to the developed world.

However, these homogenised economic policy prescriptions have, over a sustained period of time, failed to examine sufficiently the existing structural bottlenecks, as well as structural benefits that an individual developing world economy might have to offer.

There has traditionally only been limited recognition of how developing economies require different policies at different stages of development in terms of their own economic growth and development.

Therefore, the need to democratise development economics – specifically within the developing world – is now more critical than ever.

Continuous technological innovation and structural change is inherent in modern economic growth in both developed and developing world countries.

However, the policy challenges for achieving sustained economic growth and stability differ widely between developed and developing countries.

One of the most nuanced differences between the two is derived from the fact that industries in the developed world are generally on the global technological frontier, while industries in developing world are within the global frontier.

The former requires indigenous innovation in technology to push the frontier outward. The latter faces the challenge of developing their economies according to their comparative advantages and to tap into the delayed advantages of adopting already existing technology borrowed from the developed world.

With the result, there are different policy challenges for indigenous innovation versus efficient adoption.

As a consequence of these challenges, policy frameworks for developed and developing nations should not be identical.

Middle-income countries (such as South Africa) generally possess industries that represent a mix of frontier technology, and less advanced technology.

The economic theories that originate in the developed world have traditionally attempted to explain and promote growth levels strictly in a developed world context.

As such, they may not always be relevant within a developing world context because of the differences in the challenges and opportunities which have been discussed above.

Over the past three decades however, successful developing countries have generated many useful lessons for how to achieve dynamic growth.

Their experiences and policy implementations will thus be more relevant for other developing countries than the experiences of the developed countries because of the similarity of their opportunities and challenges.

Most developing countries that have followed the dominant theories of development have more often than not failed to achieve the goal of narrowing the income gap with developed countries.

Conversely nations that have managed to achieve levels of parity have tended not to follow the dominant development theories purported by the developed world. The theories and experiences that are generated from developing countries have proved to be more relevant for other developing countries over time, due to the similarity in their opportunities and constraints. As a result, there are many areas where policy innovation has come from the developing world itself.

In terms of macro-economic stabilisation, Chile has developed a cyclically adjusted fiscal rule that is a global model-for rich and poor countries alike.

Similarly, the African continent could learn much from Brazil’s successful models for expanding agricultural production in regions with similar climatic and soil conditions.

Additionally, innovative social policies in Brazil and Mexico, such as conditional cash transfers, have been adapted and adopted in numerous other developing countries.

East Asian economies, including Japan, Korea, China, Singapore and Indonesia, provide many useful experiences of developing from backward agrarian economies to modern industrialised economies through the state’s facilitation in a market-based mechanism.

The rise of “South-South” cooperation and exchange will also facilitate an increase in trade, financial flow, and the research capacity in developing countries over time.

As a result, the thinking that may have direct relevance for developing countries development is likely to come increasingly from the developing world themselves in the coming decades.

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    • Enough Said

      Good article Lee-Roy. One size does not fit all. One question I have, economic development requires new markets and more resources. The planet cannot go on supplying this indefinately. If everyone on the planet consumed what the average American consumes, we would need the resources of five planets to sustain us. At some stage our current expansionary economic tragectory is going to collapse around us.

    • jandr0

      @Enough Said: I also think we (the world) need to address the issue you raise: “If everyone on the planet consumed what the average American consumes, we would need the resources of five planets to sustain us.”

      Even worse, don’t you think, is that all – or rather most – people in the world aspire to live the same general life-style as the Americans.

      And on top of that, do any of us really expect Americans – that have now grown accustomed to this level of living – are going to easily and voluntarily lower their standard of living en masse?

      While I do not want to be a Neo-Malthusian scare monger, or reject the ability of technology to “come to the rescue,” these suppositions are worrying.

      Regrettably I have not had time to think about potential solutions, as I am mostly mentally swamped by every day evidence of corruption, nepotism, a societal infatuation with race, the growing challenges of our poor education system, and an insidiously growing South African lapse into victimhood (which, to sustain itself, must find, or even create, “persecutors”).

    • beachcomber

      ” the need to democratise development economics – specifically within the developing world – is now more critical than ever.”

      The possibility of creating an efficient economy under corrupt leadership in an ill motivated society living under the fear of war, disease and social instability is highly unlikely.

      First create the solution to democratising the vast majority of the African continent and
      please forward it to the AU for priority at their next meeting.

    • jandr0

      Let me take this down to basics as I see it.

      A strong economy is based on productivity. Yes, I agree there are other factors that contribute, like stability of regulatory environment and fiscal and monetary policies, recognition and safeguarding of personal possessions which are again employed as capital to grow the economy further, but I see them more as enabling factors, while the heart of any strong economy is productivity.

      This is where South Africa is failing.

      A careful distinction has to be made between productivity and exploitation. Due to our past, and understandably so, there is an emotional, knee-jerk reaction to view any expectation of productive effort as exploitation.

      Our problem economically is therefore a sociological issue. The immediate psychological reaction of many people in our country is “redistributive” rather than “constructive.” If I apply the “walk the talk” mantra to execution of our governmental policies, it is obvious that really only lip-service is being paid to growing our economic wealth.

      This mindset is not going to change overnight. Just look at the growth in transfer payments for substantiating my supposition.

      Even worse, the so-called “economic freedom fighters” don’t want to be constructive (i.e increase productivity through effort, innovation and entrepreneurship), they want something for nothing (i.e. redistributive). So calling themselves “economic freedom fighters” is perpetrating a massive lie.

    • Enough Said

      @jandr0

      “A strong economy is based on productivity.” Productivity for who? For those who own the means of production? Lets talk about an economy that fulfills individual needs, not their greed.

    • John

      There’s a book called: 23 Things they don’t tell you about capitalism, in which the author Ha-Joon Chang goes through a list of 23 assumptions about free market capitalism which is partially true or untrue.
      It’s changed my perception of Free market capitalism, which seemed to be the best way of structuring an economy in the long run.
      We need a new type of capitalism which addressed poverty, unemployment and inequality or we might move back to a type of communism/socialism if the populists have their way.

    • Juju Esq.

      “Under private property … Each tries to establish over the other an alien power, so as thereby to find satisfaction of his own selfish need. The increase in the quantity of objects is therefore accompanied by an extension of the realm of the alien powers to which man is subjected, and every new product represents a new potentiality of mutual swindling and mutual plundering.”

      Marx, Human Requirements and Division of Labour (1844)

    • Loudly Safrican

      “Therefore, the need to democratise development economics” – ummm, what does that mean and how does Chetty propose doing it?

      Most informed commentators recognise that the biggest constraint in SA is appallingly low productivity, often a result of our dysfunctional schooling.

      These factors, combined with a legal regime that is hostile to production (red tape, labour laws, conservative and obstructive financial institutions and government departments, ox-wagon IT services, ministerial attitudes, Cosatu militancy, corruption, etc) are chasing away investors, retarding innovation and destroying jobs.

      The clothing industry is a case in point. We once had a flourishing industry, though even at its “golden age” supply bottlenecks for fabric existed, which is now a shadow of itself and collapsing further due to ANC and Cosatu attitudes.

    • jandr0

      @Enough Said: Shame, clearly you do not understand economics.

      Now, please listen carefully:

      1. The economy creates the wealth of a country.

      2. Productivity BY (not FOR) all people who produce in an economy is what makes the economy strong.

      3. AFTER that, you can consider what to do with created wealth (especially to reinvest that into further productivity).

      But no, you want to focus on dividing up less and less (so-called “equitably”) until there’s hardly anything left. All that the “oh you poor lazy sod, you are suffering, let’s go steal money from the hard-working person over there and give it to you” approach does is make that lazy person more lazy (that is human nature), and you a thief because you steal from someone who put in the effort and actually deserve their reward.

      I understand that you have a heart – but for goodness sake, think with your HEAD dude.

    • jandr0

      @Juju Esq.: Marx is the last person to quote, the leech lived of Engels’ family’s money (from their capitalist activities).

      Plus he was a dreaming idiot. Let me rephrase your quote of his:

      “Under communism … Each tries to establish over the other an alien power, so as thereby to find satisfaction of his own selfish need. The increase in the quantity of positional power is therefore accompanied by an extension of the realm of the alien powers to which man is subjected, and every new position of power (in the collective state) represents a new potentiality of mutual swindling and mutual plundering.”

      Because that is EXACTLY what happened. More people died in the last century under communism than anything else.

      Progressive thinkers told Marx, Engels et al that their pipe dream will not work. Yet they persisted, resulting in unimagined death and destruction, and eventual widespread failure of communism.

      Be very careful. It all SOUNDS very nice, but it does not work in practice. Do not get fooled by the lovely-sounding rhetoric.

      For those who have read up on it, Engels’ dialectical materialism approach has at least one fatal flaw, and the Marxian premise of the labour theory of value is clearly nowhere rhyming with practice.

      They were foolhardy dreamers….

    • Sterling Ferguson

      @Enough Said, very good comment also, Africa is giving their resources away without adding value to them and they will run out of resources.

    • jack sparrow

      Interesting Lee Roy but no magic bullet. I think that just to just keep head above water countries need to be productive and innovative as well as have systems which encourage and support productivity and innovation. Productivity alone isn’t the key unless you are selling equal items into a competitive environment. Then it’s critical. If you have a monopoly, you needn’t be competitive (we know this in SA for sure). But in the world, monopolies are very hard to come by. If you don’t have the finance to develop a resource, it’s useless as a means of income. This where those much hated “mine bosses” come in.

      Sadly SA fails on so many levels that I believe we may see hard times, African style and sooner than we’d like.

    • Enough Said

      @Sterling

      You seldom get the point do you? And I don’t have Alzheimers , so you need not repeat the same point about adding value to each Thoughtleader article you comment on. Thanks for believing you understood what I said though. Bravo.

      @jandr0

      You neither understand economics nor Marx. The only thing that suits your agenda is right wing think tank propaganda.

      Your sarcasm and talking down to people on a regular basis makes you come across as a clown, which appears to be most fitting.

      I rest my case.

      >>>

    • nazeer

      The economist Ha-Joon Chan is mentioned here by John and this is relevant to understand the role of the state in a capitalist economy. Interstingly the Chile’s government is influenced by new thinking such as economist Chan. Our manufacturing sector is one that needs protection from cheap imports and geared to local market and new overseas markets. This is what will create sustainable jobs. Cheap is not necessarily good for our economy. Then we need a policy framework and support system (extension and marketing) to grow our peasnat farming or small-scale farming. This will have two very important effects_ it will provide greater food security for local communities and this will provide the incubator for our future large scale farmers.

      Another thing: not all people aspire to the living standards of the western world. By and large people just want to get by and provide for their family and eductate their children. peasants are pretty!

    • Sterling Ferguson

      @Enough Said, I keep repeating about Africa not adding value to their resources because this is the core of the problem in Africa. This article doesn’t get to the core of the problem in Africa and that’s Africa leaders have setup an economy of extraction of their resources, without adding value them.

      Speaking of education, Africa is losing thousandths of educated people a year to Europe and North America. You spoke about the people in America consuming so many goods, you never mention how much goods the people in America are producing.

    • jandr0

      @Enough Said: No, you don’t rest your case, because you have not made one.

      Telling me I am talking down is not making a case.

      Telling me I am sarcastic is not making a case.

      Let me make a case:

      Two countries, next to each other, similar in culture, people, history, and somewhat in natural resources (so that we compare apples with apples).

      East Germany. West Germany.

      North Korea. South Korea.

      (The old pre-capitalist) China. Taiwan.

      Happy to hear you make a case. But just calling me sarcastic and speaking down isn’t.

    • http://necrofiles.blogspot.com Garg Unzola

      @Enough said:
      Is Marx still your one trick pony? If this is the case, your clay feet is showing, especially when you call someone else ignorant of economics. Perhaps you could start by reading the classical economists that Marx plagiarised?

      @Sterling Ferguson:
      From what I can make out that’s a very accurate description of Africa’s problems. We export raw materials, with no value added to them, after we did the dirty work of getting them out of the ground. The refineries and factories that add value to these raw materials are all overseas. Don’t have the link with me but if memory serves China gets up to 1/3 of raw materials out of Africa. Why is China one of the world’s biggest economies, while Africa or African nations aren’t? 1/3 of their economy is based on Africa’s resources that they literally ship there before adding value to them.

    • jandr0

      @nazeer: You say: “not all people aspire to the living standards of the western world.”

      That is your opinion, and fine for you to have it.

      I have a different opinion.

      My first step agrees with yours, namely that initially “people just want to get by and provide for their family and educate their children.” However, as soon as that is achieved, they look around and see that life is now better, and then they want TV like the people “over there.”

      And soon after they have the TV, they again look around and now want the car, then the second TV and second car like those other people way over there… you get my drift.

      That is just the nature of humans. Yes, they’ll tell you they “only want this” right now, and at that time that is actually true. However, time moves on, and wants and needs change once the new normal becomes, well, the new normal. Don’t be misled that the CURRENTLY expressed desires, however true it is at that moment in time, is fixed forever.

      As to the rest of your Statist interventionist approach, I disagree just as strongly. I will gladly debate it with you, but for now let me just relate this.

      Silicon Valley, one of the great successes of the USA. And here is one of the things what one of the entrepreneurs say contribute to this success:

      “But what the U.S. government does do is get the heck out of our (entrepreneurs) way.”

      Simple as that.

      http://gigaom.com/2012/09/22/silicon-valley-is-stupid-which-is-why-it-works/

    • Barry Thord-Gray

      I think “economic development” is highly overrated. It is inspired by greed at the “highest” levels.

      Perhaps this world would be a “better place” if us humans concentrated more on “human development” and compassion towards all living creatures etc.

      Unfortunately the powers that be have there own agenda and the rest of us humans just follow along like lost sheep or programmed robots.

      I believe humans are far from the “intelligent species” we claim and hope to be. If we were truly intelligent, we’d make intelligent decisions which is obviously not the case.

      Peace

    • Juju Esq.

      Neither East Germany nor North Korea nor China were Marxist. They were attempts at Communism that became dictatorships stuck in a workers revolution serving mostly the dictators and not the people. Those countries were never Marxist.

      “Not only can we manage very well without the interference of the capitalist class in the great industries of the country, but that their interference is becoming more and more a nuisance.”

      Frederick Engels, Social Classes – Necessary and Superfluous (1881)

    • http://hismastersvoice.wordpress.com/ The Creator

      Economic development requires investment in productive activities which also distribute wealth — in other words, factories which employ people.

      What we are doing, on the other hand, is investing as much as possible in the financial sector, and spending a trickle of money on low-productivity, low-employment activities like mining.

      All very well to say that we need to be more like Brazil and Chile and the Pacific Rim countries, but we need to actually behave like them. Just wishing isn’t enough.So long as we are running South Africa on free-market, finance-capitalist lines, we haven’t a chance of sustaining economic development, and it goes without saying that the redistribution we need will never happen.

    • Juju Esq.

      @jandr0

      ““But what the U.S. government does do is get the heck out of our (entrepreneurs) way.”

      That is exactly why the US had a double dip recession starting in 2007. This was directly due to lack of government regulation and intervention. Greed which underlies capitalism took over and sub-prime lending went out of control, then the bubble burst. That would never happen in an economy with a well regulated financial and banking sector.

      >>

    • Peter Joffe

      As long as the ANC continues with their draconian “protect the majority’ policies, those with experience, know-how and drive will be kept from the economy and it will decline as it has been doing for many years now. Affirmative action, BEE and whatever only serve to deprive the country of those who can build factories and produce. The labour laws make it almost impossible to hire and if an employer is stupid enough to employ anyone, they face the prospect of ongoing fights with the CCMA to get rid of non productive and even dishonest employees. Most of the ‘jobs’ created in the last few years have been in government and inflated provincial structures where 3 or 4 people now try to do the work that one person once did. A title does not qualify anyone to do anything. But as our new ‘very capable’ new police commissioner so ‘wisely’ said, “You don’t’ have to be a drunkard to own a bottle store”. It would be great if the ANC realised that it is better to have a highly policeman running the police force and other highly trained and experienced people running the economy, than looking for ‘non drunkards’ to occupy high office. But then you can be the president without any education so why not all the ministers, one of the most important being Education but, as we all can see the future of our country is in the hands of another non drunkard? We don’t have to rethink economic policy we have to get rid of racist & stupid restrictions on business and the rest will take care of itself.

    • http://www.sane.org.za Yaj

      The major challenges to economic development are Peak Oil, Peak Energy, Peak everything.
      We need economic development with a view to transtitioning towards a steady-state economy, while simultaneously eradicating poverty through a more just distribution of resources and investment in renewable energy, public transport, agriculture and , food security as well as local light manufacturing.
      This can only be done throughmonetary reform with full reserve banking,universal basic income and state investment in renewable energy . public transport and agricultural infrastructure.

      Try and see the documentary “Four Horsemen”

    • jandr0

      @Juju Esq.: I beg your pardon?

      “That is exactly why the US had a double dip recession starting in 2007. This was directly due to lack of government regulation and intervention. Greed which underlies capitalism took over and sub-prime lending went out of control, then the bubble burst. That would never happen in an economy with a well regulated financial and banking sector.”

      No, that is not the complete answer. Sub-prime lending started going out of control when the government forced the Fannie Mae’s et al to provide sub-prime loans. The government also created a Federal Reserve which made money dirt cheap, thus fueling a housing bubble. They were warned about it.

      And greed does not just underlie capitalism. It underlies the human race. So when greed goes out of control, you cannot blame capitalism.

      Greed drives government as well.

    • Sterling Ferguson

      @Enough Said, JandrO, I see that Pandro has been reading my comments because she just called for adding value to the resources in SA. She says in her press release, that SA has all of the resources to develop a first class metal industry but, she is shipping all of the resources oversea, without adding value to them.

    • Sterling Ferguson

      @Garg, I see that Pandor has just come out calling for SA to add value to their resources instead of shipping them overseas without adding value to them. I think that this young lady have been reading our comments and picking our brains.

    • Barry Thord-Gray

      Your comment itself is racist as it implies that people of the “majority” (iow black) do not have “experience, know-how and drive”.

      Man, hypocrites make me sick.

    • jandr0

      @Sterling: I sure hope Ms Pandor and I have the same definition of “value-add.”

      To give an example of what would NOT be adding value: If R 1000,00 is expended on further processing of raw resources (for instance in investment and labour costs), but the market (largely buyers in other countries in this case) only see it as worth an extra R 500,00.

      In fact, that is value destruction. So simply deciding that we are now going to be processing raw materials further will not automatically make it “value-add.” In moving into further processing of raw materials, we will have to add more value to the product than our cost of adding that value. Labour cost here is potentially the big challenge – compared to most of the other countries who are our direct competitors, our labour costs are high. Other countries can therefore add MORE relative value, because their cost base is lower.

      However, I have mostly found Ms Pandor to have good insight, so I would suggest she does “get it.”

      On the other hand, sadly our “beret-clad” economic freedom fighters have mostly demonstrated that they have got Absolutely No Clue of how an economy actually works.

      Anybody else noticed how much wealth Telkom has been able to destroy in the last decade or so? Telkom obviously subject to continual state interference (others would call it intervention), in particular at Board level – where political connections clearly count for more than proven business acumen.

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      It’s great that you are getting thoughts from this article as well as from our discussion made here.

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