Friday, October 18, 2013

From the Archives: 'The Poverty of Development Economics in Africa'

(This article appeared originally in the New York City Tribune on March 16, 1990, under the headline, "The Poverty of 'Development Economics' in Africa."  It has not previously appeared on the World Wide Web.)

African development specialists complain that Poland and Hungary will get over $500 million in economic aid in 1990 while the entire continent of Africa gets only about two-thirds that amount. There are substantial arguments to justify this imbalance, the most persuasive being that the Poles and Hungarians are eager to transform their deteriorating economic systems into free enterprise zones.

At the same time, it is clear that billions of dollars poured into persistently socialist and increasingly corrupt African governments over the past two or three decades has been money down a rathole. Congress and the President seem to think that American aid should be sent where it will be used most wisely and most profitably.

Certainly, poverty in Africa is one of the most serious problems facing the world today. Pervasive hunger and heavy national debts on that huge continent drain the international economy of resources that could be put to better use elsewhere, creating wealth rather than depleting it. To understand the current sad state of economic development in sub-Saharan Africa, one must go back to the early independence period.

Unfortunately, for both political and economic reasons, African governments adopted statist economic policies whose effect was to stifle growth, not enhance it. As Indian economist Deepak Lal put it in his aptly-titled book, The Poverty of 'Development Economics', “The most serious current distortions in many developing countries are not those flowing from the inevitable imperfections of a market economy but the policy-induced, and thus far from inevitable, distortions created by irrational dirigisme.”

In other words, current poverty in Third World countries and especially in Africa is the result of conscious policy decisions by ruling elites, often aided by development economists trained in the West who quite readily discarded the classical and orthodox economics in the tradition of Adam Smith, David Ricardo, and even John Maynard Keynes in favor of dicier theories and practices.

Perhaps the most trenchant and unconventional critique of orthodox development economics is found in Jane Jacobs' widely-discussed 1984 book, Cities and the Wealth of Nations. In it, Jacobs tackles head-on the field of macroeconomics and the development policies that flow from it, calling the whole field “a shambles.”

Like others who have analyzed the history of development aid, Jacobs notes that the impulse to send aid to underdeveloped countries was electrified by the success of the Marshall Plan in post-war Western Europe. The problem, of course, is that Marshall Plan aid was intended to repair fully developed but war-damaged economies, not transform embryonic economies ex nihilo.

“The healing of organisms,” she says, “including the organisms known as economies – is not at all the same as the metamorphosis of organisms, the conversion of them into something different.” Since the growing development industry of the 1950s and 1960s insisted on calling its projects “mini-Marshall Plans” and the like, disappointment was inevitable. This disappointment came at a high prices, as well.

One estimate is that in the 30 years ending in 1986, the West transferred about $1.6 trillion to the Third World, an amount equal to the total worth of all industrial stock traded on the New York Stock Exchange, and double the value of the entire U.S. agricultural sector.

The failure of the development economists was in their definition of development. They saw poverty as an obstacle to be overcome. They used military rhetoric to define development as a single-minded goal that can be reached by strategies, long-term planning, and setting targets. The unstated assumption was that “economic life can be conquered, mobilized, bullied, as indeed it can be when it is directed toward warfare, but not when it directs itself to development and expansion.”

Moreover, as Michael Novak has often pointed out, development economists are forever seeking the “causes of poverty.” Poverty, across all cultures and for most of human history, is mankind's normal state. What needs to be explored are the causes of wealth. Fortunately, that project was set off on a good start by Adam Smith in 1776.

The key, argues Jacobs, is that by its very nature, “successful economic development has to be open-ended rather than goal-oriented, and has to make itself up expediently and empirically as it goes along.” Jacobs defines economic development “as a process of continually improvising in a context that makes injecting improvisations into everyday life feasible,” amplifying this definition with the concept of “drift”: development entails “unprecedented kinds of work that carry unprecedented problems, [which drift into] improvised solutions, which carry further unprecedented work carrying unprecedented problems ...”

Small-scale economic actors in the Third World can be remarkable flexible in this fashion. Precisely because of the precariousness of their situation (most often in the unprotected, informal sector that exists apart from the officially sanctioned economy), peasants and micro-entrepreneurs respond well to the price mechanism. Deepak Lal argues that “unlike in richer countries, economic agents in poor ones will have few 'reserves' to fall back upon and will thus have to adjust speedily to a change in their economic environment by swiftly altering the terms on which they are willing to exchange economic commodities.” In developed economies, protected by large savings or the safety net of the welfare state, economic actors “can postpone the required price adjustments in a changing economic environment.”

It seems clear from this analysis that the informal sector – which, after all, existed and grew in the pre-modern era in Western countries even during the age of mercantilism – is the most effective engine of economic growth. It alone, unencumbered by the conservatism of bureaucracies and political elites, ready to adjust to changing conditions, willing to risk arrest and prosecution in order to achieve economic success, can create the conditions for growth even in the poorest of countries. Western development aid should thus be focused on assisting the informal, small-business sector and avoid government-to-government transfers that entrench unproductive, statist policies.

Richard Sincere is a Washington-based issues analyst and author of Sowing the Seeds of Free Enterprise: The Politics of U.S. Economic Aid in Africa, published in 1990 by the International Freedom Foundation.

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