Journal Issue

A problem to everv solution

International Monetary Fund. External Relations Dept.
Published Date:
June 1985
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Paul Streeten

Reviewing the course of our thinking about development, we become aware of the 1 numerous apparent errors, false starts, and dead ends. Some claim that we have been wrong in stressing industrialization, capital accumulation, government planning, import substitution, and many other policies. There are critics who say that our objectives of economic growth, redistribution, employment creation, and meeting basic needs were all misguided. Other critics maintain that our very concepts of income, savings, investment, and employment are inappropriate for underdeveloped countries. In accounting for these errors (as well as for the true insights), there are Keynesians and Marxians. In a much quoted passage in his General Theory of Employment, Interest and Money, Keynes wrote:

The ideas of economists and political philos- \ ophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

A different version of this article will appear in the forthcoming volumeDemocracy and Development, Essays in Honor of Albert O. Hirschman, edited by A. Foxley, M. McPherson, and G. O’Donnell, University of Notre Dame Press.

Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

According to this interpretation it was the mistaken doctrines of Nurkse, Prebisch, Singer, and Rosenstein-Rodan that led governments to adopt numerous interventions, subsidize industrial capital equipment, support high urban wages, overvalue exchange rates, raise the costs of farm inputs by protecting domestic industry, keep the prices of farm outputs low, and generally neglect, discriminate against, or exploit exporters, farmers, and the rural poor.

What is the record?

A. K. Sen has shown that some of the major strategic recommendations of the development pioneers, though they have been subjected to much criticism, have turned out to be quite sound. Among them are an emphasis on (1) industrialization, (2) rapid capital accumulation, (3) mobilization of underutilized manpower, and (4) planning and an economically active state (“Development: Which Way Now?”, Economic Journal, December 1983). Sen examines the top performing countries, measuring performance in terms of growth, and finds that they show high rates of capital accumulation. He then looks at the worst performers and finds that their rate of capital accumulation has been exceptionally low. He also finds that the share of industry in GDP is strongly related to their growth performance, though the correlation here is better for the top performers than for those that grew slowly. China and Korea, among others, present illustrations of the outstandingly efficient mobilization of underutilized labor, which, of course, does not depend upon assuming zero marginal productivity of labor. Central planning and state activism are more difficult to document quantitatively, but qualitative information suggests that here again, China, Yugoslavia, Romania, and Sri Lanka, as well as Korea and Taiwan Province of China show strong government interventions. Recent work by M.K. Datta Chaudhuri, Robert Wade, and Tibor Scitovsky shows that Taiwan Province of China and Korea, sometimes held up as models of export and market-oriented economies, have powerful governments with strong interventions in the economy, and efficient protection and import substitution. Sen concludes that if we take economic growth as the performance test of an economy (as most contemporary critics of the early writers do), the death of development economics, like that of Mark Twain, has been greatly exaggerated. It still contains greater riches than those who proclaim its poverty think. But according to Sen the pioneers have been less successful in characterizing economic development, because they selected economic growth, with its emphasis on goods produced and consumed, as the main performance test of development. On this the pioneers are at one with their present critics.

If Keynes believed that it is “ideas, not vested interests, which are dangerous for good or evil,” Marx was of the view that it is the power of class interests that is reflected in ideas. The doctrines mentioned above, according to the Marxian view, are merely an ideological superstructure, reflecting the powerful vested interests of the ruling class, or, by a modification of Marxian analysis, of the urban industrialists and the labor aristocracy who benefit from expansion of the organized industrial urban sector.

According to a third view of the relation between the power of ideas and policies, it is neither ideas nor class or vested interests that shape our notions and policies but the impact of praxis and experience. Solutions to economic and social problems are worked out by men and women going about their daily work, by politicians and party officials, farmers, businessmen, union organizers, administrators, teachers, and extension workers. The grand theories only distill these practical experiences, or spin a theology above the real day-to-day tasks, mistakes, and achievements.

A more subtle analysis of the respective influence of interests and ideas was presented by Max Weber in his Essays in Sociology (Oxford, 1947): “interests (material and ideal), not ideas, dominate directly the actions of men. Yet the ‘images of the world’ created by these ideas have often served as switches determining the track on which the dynamism of interests kept the action going.”

Hydra-headed development

Many of the difficulties encountered in the path of development (and perhaps in all human endeavor) are neither the result of ideological errors nor attributable to vested interests; they are the offspring of the successful solution of previous problems. Scientific confidence asserts that there is a solution to every problem, but experience teaches us that there is a problem to every solution, and often more than one.

Consider the change from the emphasis on industrialization to agriculture and rural development. The Keynesian explanation of those who consider the industrial emphasis wrong would be that it was the result of the misleading writings of the pioneers of development, who thought that industry was the key to accelerated economic growth. The (modified) Marxians, on the other hand, would attribute it to the protected vested interests of the urban industrialists, who thought that they stood to lose if more resources were transferred to agriculture and rural development at their expense. But the sequence can be better understood as the result of the solution of one problem, which has in turn created a series of new ones. Success in manufacturing, combined with a successful reduction in mortality that led to population growth, has brought out the lag in agricultural growth. The need to expand food production for domestic consumption became so acute partly because there has been such a remarkable, unexpected, and unprecedented growth in industrial output and in population.

Similarly, the Green Revolution (produced by new seed varieties and higher fertilizer use) has spawned new difficulties relating to plant diseases, inequality, unemployment, and the other so-called second-generation problems. The need for population and birth control arose from the successful attack on mortality through cheap and efficient methods. It was the welcome introduction of modern, lower, death rates into societies with primitive, high, birth rates that caused the population explosion. Growing unemployment is (partly) the result of high productivity and growth in less labor-intensive manufacturing investment. Education raises aspirations and contributes to the movement to the cities and the consequent unemployment of the educated. The expansion of higher education in advance of employment opportunities in developing countries has also contributed to the “brain drain” of professional manpower to the industrial countries of the North. The success and attractions of urban development have emphasized the need to accelerate rural development, which, by the turmoil it creates, may further accelerate the migration to the cities.

The successful pursuit of outward-looking trade and industrialization strategies has not resulted from a simple rejection of old faulty inward-looking policies, but it was precisely these policies that provided the basis in infrastructure, and industrial and technological capacity, for the subsequent outward turn. Latin America during the depression of the 1930s and World War II was cut off from world trade and was forced to turn inward and this laid the foundations for benefiting from opening up later to the world trading and financial system. Korea, Burma, China, India, and Turkey similarly alternated phases of high protection with liberalization in trade and other policies.

The import-substituting form of industrialization has come under particularly heavy attack. Yet, some of these industries, such as Volkswagen Brazil and Bharat Heavy Electrical Industries in India, have now become very successful exporters. Clearly this does not mean that India should not also have made greater efforts to export or that the implicit time-discount rate that might justify some early mistaken investments is not extremely low, or possibly negative. But it does mean that some of the critics have underestimated the ability to learn, even from past mistakes, and the prospects of lowering production costs after this learning period.

Self-falsifying forecasts

Successful warnings are often mistaken for unsuccessful forecasts. Prophecy is not the same as forecasting, though the prophet Jonah failed to see the difference. He was told by God to predict the destruction of Nineveh. God would destroy Nineveh unless its people mended their ways. This was intended as a warning. Mistaking the prophecy for a forecast, Jonah thought that God had let him down when the people of Nineveh did mend their ways and God spared them. Many self-falsifying forecasts are of this kind. The prophecy’s function is to warn and teach and, as a result of the learning process, change the forecast. Some of the gloomy prophecies of Malthusians that population will outrun food supply, of postwar mass unemployment, of the dollar shortage, of the energy crisis, or of environmental disasters, are of this kind.

In the 25 years after World War II, investment was determined largely by growing demand without too much regard for its efficiency, and we experienced the longest period of prosperity. But it was this boom that bred the accelerating inflation, the response to which was a return to an emphasis on interest rates and rates of return on investment as the determinants of investment. What from a superficial viewpoint looks like a complete reversal of doctrines (from emphasis on fiscal to monetary policy, from demand management to supply management, from output growth and demand to interest rates and costs as principal investment determinants, from fixed to flexible exchange rates, from public intervention to reliance on the private sector) can be seen to be the response to the successful solution of one set of problems.

Can the current revulsion for government be analyzed along the same lines? Those who believe that all government interventions create rather than resolve problems, that governments can do no right, have failed to see that it is sometimes the success of government action that undermines itself. It was the spectacular success, in the quarter century after World War II, of Keynesian demand management and international cooperation (though some would deny that these were responsible for the success) that carried the seeds of the anti-Keynesian counter-revolution. In any case, the issue is not how much government action, but in what sphere, and by what means.

A sequence in which one set of solutions throws up new problems and pressures to apply intellectual efforts to their solution is a process analogous to Albert Hirschman’s unbalanced growth. If all problems were fully anticipated and solved, and no new problems were to arise from this solution, we might be approaching a kind of intellectual entropy. Only the stimulus of unexpected new challenges keeps us moving on. As in the doctrine of unbalanced growth, this mechanism cannot be used to justify or legitimize errors in development thinking and policy. Of errors there were and still are plenty. But not all difficulties, tensions, and contradictions are the result of past mistakes. In many cases we suffer from our very successes.

Hydra is perhaps the wrong metaphor, for it suggests hopelessness. Second-generation problems, on the other hand, may be too optimistic a term. The question is whether, in spite of the emergence of new problems, progress is registered. Some solutions present us with a situation worse than the initial problem. Examples would be salination resulting from irrigation, or deforestation from the use of wood for fuel. Other solutions represent progress, such as those mentioned above. Nor are solutions readily transferable between places and periods. A strategy based on import substitution can be a success in Korea and a failure in the Philippines. But it is consistent not only with Hirschman’s bias for hope and love of paradox, but also with the facts, to interpret some of our difficulties as the result of success. John Dewey, in his Human Nature and Conduct, stated the position succinctly:

No matter what the present success in straightening out difficulties and harmonizing conflicts, it is certain that problems will recur in the future in a new form or on a different plane. Indeed every genuine accomplishment instead of winding up an affair and enclosing it as a jewel in a casket for future contemplation, complicates the practical situation. . ..

Adherents of the idea that betterment, growth in goodness, consists in approximation to an exhaustive, stable, immutable end or good, have been compelled to recognize the truth that in fact we envisage the good in specific terms that are relative to existing needs, and that the attainment of every specific good merges insensibly into a new condition of maladjustment with its need of a new end and a renewed effort.

Thinkers and doers

A discussion of the doctrines of the primacy of ideas, versus interests, versus praxis raises the wider question of the relationship between thinkers and doers. There is a wide and much deplored gap between thinkers and doers, between administrators, officials, and politicians on the one hand, and scholars and academic economists on the other. Administrators have normally a quite different cast of mind from that of economists, especially those fresh from universities. Whether by endowment and temperament or whether from the pressure of events and institutions, administrators put great faith in “judgment.” They dismiss subtle distinctions as academic, and analysis in depth as a waste of time. Their purpose is to serve those who must quickly reach agreement on a course of action, and such agreement can normally be reached only after blurring distinctions and avoiding subtlety in order to reach an agreed formulation. A good example of this can be found in the discussions that led to the creation of the Special Drawing Rights. This is particularly true of value premises. Academic economists, on the other hand, do not have to agree, or help others to agree, on a course of action. Agreement among them, on the contrary, is reached by clarifying concepts, and by drawing finer and sharper distinctions. They shun agreed formulae. Indeed, they reach agreement by bringing out explicitly what it is they disagree about.

It has often been observed that the official, the practical man in authority, does not work without a theory, but that his theory is often implicit and fairly crude. The scholar’s model is by contrast explicit and, though crude compared with the complexity of reality, complex compared with the official’s implicit model.

When a civil servant or politician has said something thrice he begins to believe it to be true; when a scholar says something twice, he ceases to believe that it is true. It has lost the blush of freshness, the shock of original recognition.

The scholar believes that, with adequate time, every problem has a solution. The administrator, by nature conservative, believes that every solution brings at least one problem. The scholar is not accustomed to working under the pressure of deadlines; the official is in a hurry, always ready to sacrifice the important to the urgent. When the official asks what to do next, the scholar replies, “if you are trying to change the world, the point is first to understand it.”

In spite of some limited movement between the two groups, especially in the United States, and more now than in the past, each, more or less secretly, rather despises the other. Academics regard administrators as mindless, or at best second class, somewhat pedestrian minds, and administrators dismiss academics as—well—academic: as long-haired boys, usually to be found star-gazing from an armchair at the top of an ivory tower.

It is therefore exceedingly rare that an economist straddles both worlds and is regarded by each group as being first rate. If he succeeds in acquiring a high reputation in each group, it is because of an element of schizophrenia in his mental make-up, as well as because of outstanding intelligence. For the direct and mechanical application of economic theories to economic advice is often wrong or seriously misleading; and while practical experience obviously can illuminate theoretical work, it can also blunt the cutting edge of pure reasoning. This is why so many good academic economists give indifferent advice to officials, and why so many highly respected government economists and officials appear so dull and unoriginal in an academic seminar or at the lectern.

Since the doers are better at foreseeing some of the practical difficulties that might arise from the solution of a problem, are they therefore better at forecasting the problems that arise from success? This may be true of some academic solutions, based on gimmicks or simple tricks, to which some academic minds, inclined to abstractions, are prone. But the temperamental resistance to change and innovation of the doers is not so much the result of imaginative analysis of all implications as of conservatism. They have got to know the workings of the existing system so thoroughly that they have acquired an emotional vested interest in the status quo. The scholarly imagination can leap ahead and envisage orders of things quite different from the existing ones, but in its flight may ignore some the practical obstacles. “This may be all right in theory but won’t work in practice” gives expression to this conflict between thinkers and doers. A marriage of the two approaches would contribute to the creation of what sociologist Peter Berger called pedantic Utopians or Utopian pedants: people who apply careful, detailed analysis to a vision of a radically different social system, who use informed fantasy to envisage change and innovation.

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