I have a tremendous sense of déjà vu at reading this “new” theoretical literature. The “poverty trap” view, which now has wide currency among the young, is just a resurrection of the “vicious circle of poverty” arguments of the 1950s—except now it is attired in sophisticated mathematical garb.
…The various arguments for industrial policy are just the old arguments for protection based on the “Big Push” depending on the irrelevant pecuniary externalities or Marshallian externalities of agglomeration and increasing returns. As with the old “development economics,” the empirical evidence particularly for Japan, Korea, and Taiwan does not support these theoretical curiosa.
That is UCLA’s Deepak Lal writing in the Cato Journal, with a broadside against the new development economics.
It’s an engaging read, but I was puzzled by the attack.
When I think of the young in development economics, I think of the micro-development crew (not just the experimenters) who are quite skeptical of the poverty trap. They’re finding plenty of frictions that slow or set back the poor. Sometimes they use the language of “traps”, usually sloppily. But overwhelmingly I see them taking a more “marginalist” view, which sees improvements on the margin as slow, but simply held back by market imperfections and other frictions.
At the macro level, it’s true the economics profession has revived industrial policy as a (barely) dignified object of study, but mainly as an empirical question–one that has yet to be resolved. There are a few boosters but most of the profession is cautiously skeptical. As usual, the truth will probably lie in between–so much industrial policy will be ineffective or bad, some will be good, but most of that will be in theory or by accident, since the academically optimal policy is almost always impossible to do in practice.
I will say this: The blind spot in development economics, at least until recently, is politics, and it’s here where we ought to be looking for traps. An awful lot of countries take two steps forward only to take several steps back into coups, wars, and other political chaos. Growth follows the fortunes of politics, and so countries’ paths of development, over decades, resemble mountains and valleys, going way up then down, rather than steady inclines.
If there are increasing returns to anything in this world, it is that je ne sais quoi that brings some kind of political equilibrium, most of all a means for steady and peaceful transitions of power. Some people call this “institutions”, which strikes me as correct, but is far too vague in its meaning and origins to be helpful. The fact that this is the direction in which so many great minds are turning is actually what makes me most hopeful about the future of development economics.