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The art of economic development: markets, politics, and externalities

  • Wing Thye Woo (a1)
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I am grateful to Edward Chen, Max Corden, Sebastian Edwards, Anne Hay, Albert Hirschman, Lovell Jarvis, Chalmers Johnson, Moshe Justman, Stephen Krasner, Anne Krueger, Ian Little, Jeffrey Sachs, Steven Sheffrin, Jennie Woo, and two anonymous referees for valuable comments on early drafts of this article. I remain indebted as always to the late Professor George Andrews Hay for intellectual mentorship on development issues. I thank Wen Hai and Hong Yi Li for excellent research assistance.

1. Cited in Yotopoulos, Pan A. and Nugent, Jeffrey B., Economics of Development: Empirical Investigations (New York: Harper & Row, 1976), p. 3, fn 1.

2. See Hirschman, Albert O., “The Rise and Decline of Development Economics,” in Hirschman's, Essays in Trespassing: Economics to Politics and Beyond (Cambridge: Cambridge University Press, 1981), pp. 124; and Lai, The Poverty of ‘Development Economics’.

3. The first use of the term “activist” was by Okun, Arthur in “Fiscal-Monetary Activism: Some Analytical Issues,” Brookings Papers on Economic Activity, no. 1, 1972, pp. 123–63. The term was then publicly embraced by Franco Modigliani in his presidential address to the American Economics Association, The Monetarist Controversy, or Should We Forsake Stabilization Policy?American Economic Review 67 (03 1977), pp. 119.

4. Chenery, Hollis B., “The Structuralist Approach to Development Policy,” American Economic Review 65 (05 1975), pp. 310–16.

5. Hirschman, , “The Rise and Decline of Development Economics,” p. 3.

6. Lewis, W. Arthur, “Economic Development with Unlimited Supplies of Labour,” Manchester School of Economic and Social Studies 22 (05 1954), pp. 131–91.

7. See Prebisch, Raul, The Economic Development of Latin America and Its Principal Problems (New York: United Nations, 1950); and Singer, Hans W., “The Distribution of Gains Between Investing and Borrowing Countries,” American Economic Review 40 (05 1950), pp. 473–85.

8. See Rosenstein-Rodan, Paul N., “Problems of Industrialisation of Eastern and South-Eastern Europe,” Economic Journal 53 (0609 1943), pp. 202–11; and Rostow, Walt, Stages of Economic Growth (Cambridge: Cambridge University Press, 1960).

9. See Myrdal, Gunnar, Economic Theory and Underdeveloped Regions (New York: Harper Torchbooks, 1957); and Seers, Dudley, “The Limitations of the Special Case,” Bulletin of the Oxford University Institute of Economics and Statistics, 05 1963.

10. Myrdal, , Economic Theory and Underdeveloped Regimes, p. 97.

11. Lipsey, Richard G. and Lancaster, Kevin, “The General Theory of Second Best,” Review of Economic Studies, vol. 24, 19561957, pp. 1132.

12. See Baran, Paul, The Political Economy of Growth (New York: Monthly Review Press, 1957); and Frank, Andre Gunder, Capitalism and Underdevelopment in Latin America (New York: Monthly Review Press, 1967).

13. Frank, , Capitalism and Underdevelopment in Latin America, pp. 67.

14. Frank, Andre Gunder, Lumpenbourgeosie and Lumpendevelopment (New York: Monthly Review Press, 1972).

15. Nurkse, Ragnar, Problems of Capital Formation in Underdeveloped Countries and Patterns of Trade and Development (Oxford: Oxford University Press, 1967), pp. 199201.

16. Myrdal presented the special reasons for protection in underdeveloped countries in An International Economy (New York: Harper Torchbooks, 1956), pp. 275–79, and he recognized that export of manufactured goods would perform the same functions. His strong objections to continued economic ties to the West are developed in Economic Theory and Underdeveloped Regions.

17. Matthew 25:29, quoted in Myrdal, , Economic Theory and Underdeveloped Regions, pp. 12 and 24.

18. Balogh, Thomas, Unequal Partners (Oxford: Basil Blackwell, 1963), pp. 1617.

19. McClelland, David, The Achieving Society (Princeton, N.J.: D. Van Nostrand, 1961).

20. Ibid., p. 403.

21. Hirschman, Albert O., Development Project Observed (New York: Brookings Institute, 1967), chap. 1.

22. Ibid., p. 5. The principle of the hiding hand is thus an early statement of the “learning-by-doing” literature and of the human potential movement.

23. Myrdal, Gunner, Asian Drama (New York: Pantheon, 1968).

24. The two earlier collections of Bauer's, Peter essays are Dissent on Development (Cambridge, Mass.: Harvard University Press, 1971) and Equality, the Third World and Economic Development (Cambridge, Mass.: Harvard University Press, 1981).

25. Bauer, , Dissent on Development, p. 34.

26. Bauer, , Reality and Rhetoric, pp. 158–59.

27. Ibid., p. 57.

28. Ibid., p. 156.

29. Ibid., p. 43.

30. Lal, , The Poverty of‘Development Economics,’ p. 57.

31. Kuznets, Simon, “Economic Growth and Income Inequality,” American Economic Review 45 (03 1955), pp. 128.

32. Hirschman, , “The Rise and Decline of Development Economics,” p. 20.

33. Adelman, Irma and Morris, Cynthia, Economic Growth and Social Equity in Developing Countries (Stanford, Calif.: Stanford University Press, 1973), p. 179. The limited time series evidence now available suggests an indeterminate relationship. Fields, for example, found impoverishment of the poorest groups in three of twelve countries in his sample. See Fields, Gary S., “Income Distribution and Economic Growth,” in Ranis, and Schultz, , The State of Development Economics, pp. 459–81.

34. See Schumacher, E. F., Small Is Beautiful: Economics as If People Mattered (New York: Harper & Row, 1973); Haq, Mahbub ul, The Poverty Curtain: Choices for the Third World (New York: Columbia University Press, 1976); Lele, Uma, The Design of Rural Development: Lessons from Africa (Baltimore, Md.: Johns Hopkins University Press, 1975); and Timmer, Peter et al. , The Choice ofTechnology in Developing Countries: Some Cautionary Tales (Cambridge, Mass.: Harvard University Center for International Affairs, 1975).

35. For a thorough treatment of ERP, see Corden, W. M., The Theory of Protection (Oxford: Oxford University Press, 1971). Appendix I of the book gives the history of the development of the ERP measure.

36. See Balassa, Bela, Development Strategies in Semi-Industrial Economies (Baltimore, Md.: Johns Hopkins University Press, 1982); Bhagwati, Jagdish, Anatomy and Consequences of Exchange Control Regimes (Cambridge, Mass.: Ballinger, 1978); Krueger, Anne O., Liberalization Attempts and Consequences (Cambridge, Mass.: Ballinger, 1978); and Little, Ian, Scott, Maurice, and Scitovsky, Tibor, Industry and Trade in Some Developing Countries (Oxford: Oxford University Press, 1970).

37. Lipsey, Robert in the foreword of Krueger, Liberalization Attempts and Consequences, pp. xv and xvi.

38. There are, of course, numerous systems to classify policies. Bradford and Branson have proposed a broader spectrum of classification in “Patterns of Trade and Structural Change,” in Bradford, Colin I. and Branson, William H., eds., Trade and Structural Change in Pacific Asia (Chicago: University of Chicago Press, 1987), chap. 1. The theoretical inconsistency and empirical emptiness of their classification scheme has been discussed in an earlier review; see Woo, Wing Thye, “Review of Trade and Structural Change in Pacific Asia,’ Journal of International Economics 25 (07 1988), pp. 199204.

39. Evans, Peter, “Foreign Capital and the Third World State,” in Weiner, Myron and Huntington, Samuel, eds., Understanding Political Development (Boston: Little, Brown, 1988).

40. Schultz, Theodore W., Transforming Traditional Agriculture (New Haven, Conn.: Yale University Press, 1964).

41. Friedman, Milton, A Monetary History of the United States (Princeton, N.J.: Princeton University Press, 1963).

42. See Bank, World, World Development Report (Oxford: Oxford University Press, various years).

43. See Edwards, Real Exchange Rates, Devaluation, and Adjustment; and Lin, Latin America Versus East Asia.

44. Lin, Latin America Versus East Asia.

45. See Edwards, Real Exchange Rates, Devaluation, and Adjustment; and Lin, Latin America Versus East Asia.

46. Edwards, Real Exchange Rates, Devaluation, and Adjustment.

47. Lai, , The Poverty of ‘Development Economics,’ p. 109.

48. Corbo, Vittorio, “Problems, Development Theory, and Strategies of Latin America,” in Ranis, and Schultz, , The State of Development Economics, pp. 145–86.

49. Ranis, Gustav and Fei, John, “Development Economics: What Next?” in Ranis, and Schuitz, , The State of Development Economics, p. 103.

50. Ibid., p. 130.

51. Ibid.

52. Findlay, Ronald, “Trade, Development, and the State,” in Ranis, and Schultz, , The State of Development Economics, pp. 7899.

53. Ibid., p. 91.

54. Ranis, and Fei, , “Development Economics: What Next?” p. 101.

55. Ibid., p. 110.

56. Sachs, Jeffrey, “External Debt and Macroeconomic Performance in Latin America and East Asia,” Brookings Papers on Economic Activity, no. 2, 1985, especially pp. 548–65. East Asia in Sachs' usage includes Southeast Asia.

57. Ibid.

58. The exception is the brief interlude of emergency rule in 1975–77.

59. Woo, Wing Thye, “The Economic Policy-Making Equation in Indonesia,” Pacific Rim Studies Program Working Paper no. 5, University of California, Davis, 1988.

60. This implies that the constraints are not binding.

61. See Johnson, Chalmers, “Political Institutions and Economic Performance: The Government Business Relationship in Japan, South Korea, and Taiwan,” in Scalapino, Robert, Sato, Seizaburo, and Wanandi, Jusuf, eds., Asian Economic Development: Present and Future (Berkeley: University of California Institute of East Asian Studies, 1985), pp. 6389; and Pye, Lucian, “The New Asian Capitalism: A Political Portrait,” in Berger, Peter and Hsiao, Michael, eds., In Search of an East Asian Developent Model (New Brunswick, N.J.: Transaction Books, 1988), pp. 8198.

62. Johnson, , “Political Institutions and Economic Performance,” p. 67.

63. Pye, , “The New Asian Capitalism,” p. 83.

64. Gordon, Robert J., “Fresh Water, Salt Walter, and Other Macroeconomic Elixirs,” expanded version of a paper that appeared in Economic Record, 03 1989.

65. JrLucas, Robert E., “On the Mechanics of Economic Development,” Journal of Monetary Economics 22 (07 1988), p. 14.

66. Lai, , The Poverty of ‘Development Economics,’ pp. 4647.

67. Balassa, Bela and Sharpston, Michael, Export Subsidies by Developing Countries: Issues of Policy (Geneva: Graduate Institute of lnternational Studies, 1977), p. 34.

68. Li, , The Evolution of Policy Behind Taiwan's Development Success, pp. 104 and 142.

69. Ibid., p. 106.

70. Jennie Hay Woo, “Taiwan as a Case of Successful Educational Planning,” World Development, forthcoming.

71. Li, , The Evolution of Policy Behind Taiwan's Development Success, p. 147.

72. Woo, “The Economic Policy-Making Equation in Indonesia.”

73. Lai, , The Poverty of‘Development Economics,’ p. 46.

74. Johnson, Chalmers, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 (Stanford, Calif.: Stanford University Press, 1982).

75. Lucas, , “On the Mechanics of Economic Development,” p. 12.

76. The slope of the balanced growth path is known as the steady-state growth rate, and it equals the sum of the population growth rate and the rate of technical innovation. The trade regime can affect the slope only if it affects either of these two rates.

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