Exporting Central Planning - why Development Economics is often an oxymoron

This picture shows economist John Maynard Keynes with Harry Dexter (US Treasury) at the inaugural meeting of the International Monetary Fund (IMF) in 1946.

It's a well known -- yet rarely acknowledged -- fact that Keynes was instrumental in the formation of the World Bank and the IMF - meta government institutions founded on the principle that
a committee of intelligent and well-intentioned men possess the wisdom and information necessary to "steer" an economy.

Despite the free-trade, capitalist rhetoric that is attached to the Washington consensus, there should be no mistake that the IMF and World Bank are built upon the principles of central planning, and government intervention.

Despite the vast gains in computer processing technology, the dream of those men has largely failed. Macroeconomics arose as a discipline to compare aggregate variables in a mechanistic fashion, amassing a slew of statistics with which to perform econometric analysis. Measurement and manipulation was the aim.

But it didn't work. The stagflation of the 1970s irreparably damaged "Keynesian economics" resulting in a situation now where the sole aim of most central banks is to keep inflation low. Labour and Tory alike agree upon the importance of individual choice - regarding where to work and what to buy - as being the foundation of a prosperous society. For sure, subsidies and market distortions abound, but by and large the Fatal Conceit has been curbed and no party believes it can and should run an economy. As Tim Garton-Ash says:

the left now seems no longer to be about the best way to produce wealth, only about the best way to distribute it

So lament the fact that we don't apply this lesson abroad.

The field of Development Economics is little more than an exportation of the Keynesian system that we've rejected at home. The DFiD is far from being a plum ministerial job, and their lagging economic competence still maintains that large-scale planning is the best way to produce wealth. The culture of aid necessitates measurement - a bank won't release funds without means to assess the way it's being spent, so similarly the IMF and World Bank seek observable returns. This propagates the statistics and measurements that are irrelevant for prosperity.

In the GI's Intellectual Revolution in Development Economics (discussed by Owen and Jim), the emphasis is on enterprise solutions to poverty - the role of microcredit and other bottom up initiatives. Perhaps an even bigger revolution concerns the methodology being used - a movement away from econometrics toward case studies. Planners need computers and formulae. They see the economy as being akin to a giant machine with systems of levers that can be fine tuned to achieve particular goals. A genuine bottom-up approach looks at emergent phenomena and spontaneous order - things only observable via smaller studies that can incorporate culture, local knowledge, and individual choice. The policy proposals that emerge from such an endeavor are what we already know - the rule of law, a competant and transparent government, private property rights, freer trade etc.

The great irony is that we use the label "developing country" to describe places that aren't developing - they're stagnant. We call the countries that are actually developing  "developed". This is symptomatic of the static thinking that pervades Keynesian thought. You're either one thing or another, there's nothing in between. Only a theory of market process (i.e. Austrian economics) treats dynamic time and uncertainty seriously.

Development isn't something to be achieved, it's a process.

Obviously I exaggerate slightly, and in many ways the World Bank and IMF are unrecognizable from their founding principles. Perhaps my complaint is more to do with the acknowledgment of past errors than the propagation of current ones. But regardless, my claim is simple: development economics needn't be about planning. When I claimed that PT Bauer (pictured) had been vindicated, Owen said: Nothing could be further from the truth.

I'll leave you with the words of Amartya Sen - eminent development economist and former critic of Bauer:

Peter Bauer is in a class of his own as an outstanding economist. The originality, force, and extensive bearing of his writings have been quite astonishing. He is a real pioneer of modern development economics…Many of Bauer’s claims, while resisted at the time, have become a part of the new "establishment" of ideas. Like the old lady who went to see Hamlet and felt it was full of quotation, a young reader of Bauer’s early books may find his arguments rather familiar. This is, to a great extent, evidence of his triumph, though the new enthusiasts for Bauer’s ideas often do not give him enough credit.

Comments

[HJ]

Nice post Anthony, a thought-provoking summary. I probably disagree with you in many ways but on the whole I think I'm with you (and therefore by extension the GI? ooer!) about the importance of local initiative (and aid fostering these where it can be helpful) as opposed to (some) imposed projects; healthcare and education I feel must be mostly provided by sovereign governments as in the UK though. And if said governments are too weak, too corrupt to do this, then what structural factors (often IFI-related, externally imposed) are contributing to this?

Just one point though, and I realise by quoting him I'm not going to change your mind, as I'm sure you consider him other-side-of-the-fence, but George Monbiot for one disputes the idea that Keynes was the force behind the Bretton Woods Institutions (this is described at more length in his The Age of Consent):

http://www.monbiot.com/archives/2001/11/20/making-generosity-redundant/

In truth, Keynes bitterly opposed them. He predicted that if the world economy was managed by these means, the wealth and power of the creditor nations would be massively enhanced, while the debtors would sink ever further into poverty and dependency. He called instead for an “international clearing union” which would automatically redeem imbalances in trade and cancel debt, by the ingenious means of forcing creditors to pay interest on their international currency surplus at the same rate as debtors.

Once again, the United States objected. It threatened to withold its war loan if the British delegation, led by Keynes, persisted with his proposal, and he was forced to back down and agree to the formation of the bodies which later became the World Bank and IMF. In a letter to the Times soon afterwards, Keynes conceded that the commercial policies the new bodies would permit may prove to be “very foolish” and “so destructive of international trade that, if they were adopted, Bretton Woods will have been rather a waste of time.”

[HJ]

"and if said governments are too weak, *or* too corrupt", I should have said

[AJE]

The thing about Monbiot - and especially Joe Stiglitz - is that they're spot on when discussing why certain institutions fail. But their conclusions always seem to be that the reason they fail is down to poor leadership, and that if they were in charge it'd work.

The beauty of smaller projects is that you eliminate the chance of "the wrong person being in charge", since no-one is!

Regarding the role of government in health and education, take a look at this. Not a complete solution, for sure, but a fundamental switch in thinking.

[Jim]

"Labour and Tory alike agree upon the importance of individual choice - regarding where to work and what to buy - as being the foundation of a prosperous society."

While I'm no expert on Keynes, he arguably believed the same thing. I came across a quote from the General Theory recently in which he said he saw "no reason to suppose that the existing system seriously misemploys the factors of production which are in use ... It is in determining the volume, not the direction of actual employment that the system has broken down ... [There] is no objection to be raised against classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them".

Now, you can argue over whether that is consistent with the rest of his work or even whether it's an internally coherent statement, but it seems clear to me that Keynes didn't see the role of government as the kind of total central planning you envisage.

And the same, I would argue, goes for the World Bank and DFID. Both fund some areas of government spending, sure, but if they were that obsessed with "large-scale planning [as] the best way to produce wealth" why have they been so keen on promoting privatisation in poor countries? DFID does not, to my knowledge, promote government ownership of the means of production in poor countries - in fact, I wouldn't be surprised if DFID funds a narrower range of government activities than we 'enjoy' in the UK, so I just don't see how you can argue that the strong version of central planning is alive and well in development economics. To equate *any* government spending in education, transport infrastructure and economic development with Stalinist control of every aspect of the economy is historically inaccurate and conceptually useless.

"The policy proposals that emerge from such an endeavor are what we already know - the rule of law, a competant and transparent government, private property rights, freer trade etc."

As China has demonstrated. Not.

I should say there's actually some I agree with in your post. I'm personally inclined towards bottom-up solutions - I just think there's a role in poor countries as in rich countries for public spending to enable bottom-up actors to make the most of their opportunities. My reading of the historical record is that a strong and effective public sector is supportive rather than destructive of a strong and effective private sector.