Reflections on Development Lectures and Economics of Transition Economies

First off, it may seem like a trivial distinction, but inefficiencies and lack of innovation incentives of SOEs did not result from a lack of competition, per se, as was brought up in today's lecture. In fact, we see many monopolies in industrialized, market-based economies that try to cut costs wherever possible because they reap the rewards of increasing profit. SOEs, on the other hand, did not stand to benefit from cost-cutting technological innovation and, therefore, lacked innovation incentives.

More broadly, I think there is a Part B, so to speak, that was omitted from the discussion of the development of development economics. This part of the story begins with the fact that beginning in the mid to early 1970s, the development communities in South Asia, Africa and Latin America built the required infrastructure, taught the technicians, assisted the economists and ministers, and so on. In other words, everything you would think needed to be done....was done. A skeptic might ask, "Where are these roads and bridges you speak of? And why aren't the governments filled with competent leaders?" The short answer is that the runways are right where they were left...they just happen to under about a foot of dirt; and the experts are there, too...they're just not in office. The more serious answer is that the sort of programs and projects completed by development teams is the sort that requires a great degree of maintenance, and maintence requires a great degree of funding. Despite all that the development community has done to help alleviate poverty, the amount of funding that most of these countries receive as a percentage of their GDP is quite small; in the case of India, it's almost neglible. In other words, the development community faces strictly binding funding constraints that make it impossible to both buid everything AND maintain it. That being said, the definition of development surely has to at least include a sustainability component, after all, how can a country temporarily succeed in development? Eventually, the development community realized that the lack of maintanence stemmed from a lack of a feeling of ownership or agency; those projects that tended to benefit from upkeep were those that were at least partially envisioned and championed by the recipient country. Therefore, the progression within the field of development in recent years has been to hand over the reigns to the country receiving assistance since a project can only be successful if it is given long-term maintanence funding, which happens over the long-run only with those projects that are internally deemed to be of great import (which isn't to say that delegates of the Washington Consensus don't try to plead their case). In practice, development of this sort turns out largely to be on a project by project basis; when a country or community asks for assisstance in building a well, let's say, the success of the project is based on how the well serves the community as opposed to its projected effect on long-term income growth. It is for this reason that I was disappointed to hear Professor King belittle the good the comes from particular projects and programs. The development of development economics has shown these sorts of programs, provided they are supported by the recipient country, are really the only avenue available to outsiders who want to help alleviate suffering around the world. The grandiose, macro-level projects that King claimed define the true field of development (taking a page out of the Palin book of "real" dichotomies) have not been successful over the long-run. To summarize, only those projects, programs or policies that are embraced/championed/envisioned by the recipient country stand a chance of producing sustainable development improvements.

Finally, I'd like to bring up an article titled "Institution Building and Growth in Transition Economies" (Beck and Laeven 2006) that seeks to explain the divergence in GDP growth between Central and Eastern European countries and former Soviet Union countries in terms of institutional development, which itself is a function of the entrenchment of elites and the richness of natural resources. This article is particularly relevant since its causality differs from Lipset: political and geographic factors --> institutional development --> economic growth. The intuition being that socialist elites who had been in office a long time in countries rich with natural resources were out to capture rents instead of being fully committed to building strong, market-based/compatible institutions.