Free market take on development economics

William Easterly, probably the world’s best-known free market inclined development economist, gives his view of the emergence of development economics in an article in the Wall Street Journal:

“Development economics — the study of how poor countries can become rich — was forever cursed by the timing of its birth after the Great Depression. That gave development economics a bias toward relying on governments, rather than markets, to create growth. The early development economists ignored a century and a half of European and North American development through individual enterprise, remembering only that their governments forcefully intervened to stimulate output during the 1930s.

“What is widely agreed to be the seminal article in development economics appeared in 1943, calling poor countries “depressed areas.” The Economic Journal article by Paul Rosenstein-Rodan, “Problems of Industrialization of Eastern and South-Eastern Europe,” concluded that a fourth of the population of these countries was unemployed, and the solution rested in ceding development to the state. Development comes from state-planned investment in all sectors at once, the “Big Push,” not reliance on private investors: “An individual entrepreneur’s knowledge of the market is . . . insufficient,” because he cannot have all the data “available to the planning board.”

“Similarly, the U.N.’s Depression mindset prompted them to ask an expert commission led by Sir Arthur Lewis in 1950 to prepare a report on unemployment in underdeveloped countries. Its report concluded that “economic progress depends to a large extent upon the adoption by governments of appropriate . . . action,” and that political leaders must have a strategy for such growth, reflecting “the facts of each particular case.”

No doubt Easterly is right to argue that when development economics emerged it was a product of its time. At that point state intervention was widely popular. However, he is wrong to argue that America and Western Europe emerged as a result of individual enterprise – the state played a substantial role.

More importantly it is no sadly no longer true to define economics as “the study of how poor countries can become rich”. At best the current perspective can be defined as “the study of how poor countries can become just slightly less poor”.